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Four Ways to Modify a Loan to Avoid Default

Posted on in Loan Modification

Four Ways to Modify a Loan to Avoid DefaultWhen debtors are struggling to pay off loans, creditors often consider loan modification before taking more drastic legal action. Foreclosure and repossession are surer ways to recuperate money or assets from a debtor, but those methods may fail to collect the entire value of the loan. By using loan modification, the debtor still has a chance to fully repay the loan, often with added interest. Creditors are taking a risk when agreeing to a loan modification:

  • They are permanently changing the loan agreement in a way that may benefit the debtor; and
  • They are trusting that the modification will be enough to help the debtor repay the loan.

In some cases, a loan modification only delays necessary legal action to recover a debt. Creditors must judge whether the debtor is likely to repay the loan and whether the modification is worth the effort. There are several ways to modify a loan in order to assist a debtor:

  1. Forbearance: The creditor can temporarily reduce or suspend loan payments, with the agreement that the debtor will repay the difference when the forbearance period has ended. Forbearance is best used when the debtor is going through temporary financial hardship that he or she expects to recover from.
  2. Term Extension: The creditor can add years to the loan repayment schedule. The value of each payment will go down, but the overall interest paid on the loan will increase. The creditor must determine how long it is willing to delay reimbursement of the loan.
  3. Interest Rate Reduction: The creditor can temporarily or permanently reduce the interest rate on the loan, thereby lessening the payments. The money lost from the reduced interest is often added to the principal of the loan.
  4. Principal Reduction: This modification is the least favorable for creditors because it decreases the value of the loan that the debtor must repay. Creditors may forgive a portion of the debt in hopes of increasing the chance of retrieving the remaining debt. However, the creditor is accepting a loss on the loan.

Best Option

A creditor who successfully modifies a loan agreement can retrieve the full value of the loan and accrue additional money from the prolonged interest on the loan. Choosing the method of modification, or whether to modify at all, depends on the nature of the loan and the debtor. A Chicago debt collection attorney at Walinski & Associates, P.C., can explain the benefits of each option and when legal action is necessary. Schedule an appointment by calling 312-704-0771.

Source:

https://www.mortgageloan.com/mortgage-loan-modification/types

Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
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