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Forbearance in Bankruptcy

Forbearance in bankruptcy refers to borrowers who have obtained a forbearance agreement from their mortgage lender or secured creditor. This type of contract is offered to borrowers who have become delinquent with loan payments and require time to get back on track.

Forbearance in bankruptcy is intended to grant borrowers financial relief while they reorganize debts. Unfortunately, forbearance agreements often only prolong the inevitable repossession of property or creditor judgment.

A forbearance agreement can be used for mortgage loans, student loans, and most types of secured loans. Lenders reduce or suspend loan payments for one or more months, with the average duration being three months.

Once forbearance agreements end, borrowers must pay a lump sum payment for the full amount of skipped payments. When forbearance plans extend for several months, paying the full amount often causes borrowers to default on the plan. This results in foreclosure, repossession of property secured by the loan, or creditors obtaining court ordered judgments.

If debtors file bankruptcy while a mortgage forbearance is in place, banks can void the contract. Once the bankruptcy petition is filed, an automatic stay is imposed that prevents all creditors from engaging in collection activities. However, mortgage lenders are permitted to file a 'motion for relief from stay'.

When a motion for relief is filed, borrowers have the right to present defenses to the bankruptcy court. If the motion is granted, lenders can commence with foreclosure. Otherwise, past due amounts are reorganized through Chapter 13 payments plans.

While no one wants to lose their home to foreclosure, sometimes this is the only way to stop the financial bleeding. When borrowers enter into mortgage forbearance they can easily get in over their head quickly and find it next to impossible to recover. This then leads to personal bankruptcy which carries it own set of financial complications.

The new bankruptcy laws that took effect in 2005 have made it difficult for debtors to file personal bankruptcy and even harder to remain in compliance. Most debtors are required to repay outstanding debts through a payment plan that can extend for 2 to 5 years. In addition to paying bankruptcy payments, debtors must be financially capable of paying all future loan installments.

If debtors are unable to comply with Chapter 13 payments they will fail out of bankruptcy and lose all protection from the court. Debtors cannot file bankruptcy again for 8 years.

Prior to engaging in forbearance agreements, borrowers should talk with a bank loss mitigator to discuss all available options. Lenders have multiple options when it comes to mortgage loans that may offer debt relief without the restrictions of forbearance plans.

These can include allowing borrowers to sell their property under a short sale agreement or returning their home using a deed in lieu of foreclosure. The type of foreclosure prevention strategy used will depend on how much is owed on the mortgage note, number of delinquent payments, borrowers' credit score and ability to pay future payments.

We encourage you to visit our bankruptcy prevention article library to learn more about the various options. Topics include real estate short sales, deed in lieu of foreclosure, deferred payments, mortgage refinance, loan modification, and forbearance in bankruptcy.