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Key Differences Between Forbearance and Loan Modification

Posted on in Loan Modification

Key Differences Between Forbearance and Loan ModificationWhen a borrower is defaulting or about to default on a loan, the lender can offer to modify the loan agreement to allow the borrower to repay the debt and avoid the consequences of violating the agreement. Loan forbearance is a tool that lenders and borrowers use to temporarily reduce or stop debt payments. The borrower agrees to repay the missed payments at a later date, with interest sometimes added. Forbearance is most often used when a borrower is going through a temporary financial hardship and anticipates being able to catch up on the payments once the hardship has passed. However, forbearance is different from loan modifications, and some of the differences can be advantageous to a lender.

Separate Agreements

With a loan modification, the lender and borrower are changing the original loan agreement to create a new repayment plan that the borrower can adhere to. Loan forbearance is creating a new agreement that temporarily supersedes the original loan agreement. The forbearance agreement should state:

  • The specific debt owed from the original agreement;
  • The duration for which the lender will agree to not enforce the terms of the original agreement;
  • What payments the borrower is expected to make during the agreement; and
  • The deadline by which the borrower must repay the difference between the money that would have been owed during the agreement period and what was actually paid.

Default

Modifying a loan agreement prevents the borrower from defaulting, but loan forbearance can be an admission of default. In the forbearance agreement, the borrower acknowledges that he or she cannot make the required payments in the loan agreement, and the lender agrees to delay any debt collection efforts or litigation against the debtor. However, the original loan agreement remains active and unchanged. So, the borrower has defaulted on the original agreement, and the lender is not acting on the default as long as the borrower follows the forbearance agreement. The lender can take immediate legal action if the borrower defaults on or violates the forbearance agreement. Because the borrower acknowledged defaulting on the loan agreement, the lender may have strong evidence during litigation.

Weighing Options 

Loan modification and forbearance bear risks for lenders. Creditors should not change their agreements or enter new agreements without assessing the likelihood that the debtor will be able to follow the new terms. Creditors also must carefully write agreements in order to protect themselves in case of default. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can help you create and review loan and forbearance agreements. To schedule a consultation, call 312-704-0771.

Source:

https://www.illinoislegalaid.org/legal-information/options-dealing-foreclosure

Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
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