Covid-19 Mortgage Forbearance Pitfalls

The COVID-19 outbreak has upended many Michigan residents’ lives. Many people in Michigan have been laid off, permanently lost employment, or have had reduced hours. This loss of income has resulted in many residents taking advantage of the forbearance options being offered by their mortgage lenders.

A forbearance allows the mortgage payer to discontinue monthly mortgage payments for a set period without affecting the borrower’s credit. When the set period concludes, all the payments that accumulated during that period are now owed. The mortgage forbearances were allowed for up to a year on many mortgages and it is expected that many will start coming due in March 2021. Many borrowers will not have the resources because of their loss of income to pay a year worth of accumulated mortgage payments.

What are the options? The hope is that mortgage lenders will offer loan modification options to assist borrowers that are unable to make the accumulated payments. A loan modification would generally allow those amounts to be put to the end of the loan to be paid in the future, so the borrower is considered current. Some lenders will find that the borrowers do not meet the criteria they require to seek this option. This could lead to lenders seeking foreclosure.

A foreclosure can be stopped by filing a bankruptcy. Chapter 13 bankruptcy allows a borrower (also referred to as a debtor) to catch up the arrearage on the mortgage over a five-year period in a court ordered Chapter 13 plan. If the borrowers are back to work this could allow for the needed time to get their mortgage on track. If the borrower is unable to make payments through such a Plan, a chapter 7 bankruptcy would allow the debtor to surrender their home without any further obligation on the property. Unfortunately, this would involve giving back the property to the mortgage company.

The pandemic has created a multitude of problems for individuals. Differing approaches by states to provide aid to those that are struggling has created a great deal of uncertainty. Unfortunately, the forbearance issue is one problem that is likely to be a large issue in this first quarter of 2021. Rest assured that USADebt Bankruptcy Attorneys will continue to monitor the landscape to help determine how to assist individuals encountering mortgage issues.

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