5 Types of Loan Modifications Creditors May Negotiate With Debtors

 Posted on April 27, 2023 in Loan Modification

There are a variety of situations where creditors may need to deal with borrowers who have defaulted on loans or are struggling to make payments. While there are many debt collection options available to creditors, it can sometimes be beneficial to work with a debtor to find solutions that will allow them to continue making ongoing payments. Loan modifications may involve changes to a lending agreement that will make it easier for the debtor to adhere to the terms of repayment. By understanding the different types of loan modifications that may be available, creditors can take steps to protect their financial interests.

Options for Modifying Loans

To address delinquent loans or defaults, creditors may reach agreements with debtors that may include:

• Forbearance - A creditor may agree to suspend or reduce a debtor's monthly payments for a specific time period. This can be a good option for borrowers who are experiencing temporary financial difficulties due to unexpected changes in their lives, such as health issues, job loss, or divorce. However, forbearance is not a long-term solution, because the debtor will be required to resume payments at some point in the future. The missed payments may be added on to the end of the loan term, or future payments may be temporarily increased, and this may mean that the borrower will owe more in the long run.

• Interest rate reduction - One of the most common loan modification options used by creditors involves reducing the interest rate on the loan. This can greatly benefit the borrower, as the lower interest rate will reduce the amount of their monthly payments. The reduction in interest rate can be temporary or permanent, depending on the agreement between the parties. Lower monthly payments may help the borrower stay current on payments and avoid the loan going into default.

• Extended repayment period - Another option that may be beneficial to both creditors and debtors will involve extending the amount of time needed to repay a loan. This would mean that the borrower will have more time to pay off the debt, which can result in lower monthly payments. This may be a good option if the borrower’s financial situation is expected to improve in the coming years. However, the debtor will pay more in interest over the extended repayment period, so this is not the preferred option for most borrowers.

• Principal reduction - In some cases, creditors may be willing to reduce the total amount owed on the loan. This is usually done when the borrower owes more than the collateral securing the loan is worth, such as when a home has decreased in value after the homeowner originally obtained a home loan. In this situation, the creditor may face a significant loss if they proceed with a foreclosure. By reducing the amount owed, the borrower may be able to avoid foreclosure, and their mortgage payments may be more manageable.

If the borrower is unable to pay a mortgage loan, even with loan modifications, the creditor may agree to a short sale or deed in lieu of foreclosure. With a short sale, the property may be sold for less than what is owed on the mortgage, and the creditor may agree to forgive the remaining balance. With a deed in lieu of foreclosure, the borrower will transfer ownership of the property to the creditor in exchange for the cancellation of the debt. Both options are typically used as a last resort when no other loan modification options are available.

Contact Our Chicago Creditor Loan Modification Lawyers

For creditors, understanding the different types of loan modifications that can be negotiated with debtors can mean the difference between successful and unsuccessful loan collections. Knowing which loan modification is best suited for a debtor's situation and ensuring that they will have the means of adhering to the new agreement can benefit everyone involved. A successful loan modification can lead to a win-win situation for both the debtor and the creditor. At Dimand Walinski Law Offices, P.C., our Cook County creditors' rights attorneys can assist in negotiating loan modifications, and we work to ensure that creditors can protect their financial interests in these situations. Contact us at 312-704-0771 to schedule a consultation.

Sources:

https://www.consumerfinance.gov/rules-policy/regulations/1024/41/#41-k-5-Interp-1

https://www.bankrate.com/mortgages/loan-modification-strategy/#when-to-use

https://www.forbes.com/advisor/mortgages/mortgage-modification/