The coronavirus outbreak in the U.S. is being fought on two fronts: public health and the economy. Government efforts to slow the spread of the virus have caused many Americans to lose their jobs or see their pay drastically cut. Among other expenses, people who are out of work may have more difficulty repaying their debts. Creditors are in a delicate position where they must balance their own interests against the hardships that many debtors are experiencing. As a result, forces in the public and private sector are providing debt relief by allowing some debtors to suspend their payments without penalty.

Government Action

The federal government has recently issued orders in regards mortgages and student loan payments:

• Mortgages that are backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration are eligible for up to 12 months of forbearance.
• Lenders cannot charge late fees on the delayed payments.
• Foreclosures are suspended for 60 days, starting from March 18.
• The proposed stimulus bill would suspend federal student loan payments until Sept. 30.

Various states have enacted similar suspensions on foreclosure and eviction for mortgages that are backed by state programs. As of March 25, Illinois had not announced any mortgage forbearance period.

When 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: