Weighing Loan Modification or Debt Collection Options as a Creditor

 Posted on August 15, 2022 in Debt Collection

A creditor's business model is reliant on its ability to receive payments from debtors. When debtors fail to make payments as required, creditors will need to determine the most financially beneficial methods for collecting what is owed. If a debtor has defaulted on a loan, a creditor may pursue a number of different debt collection actions. However, there may be some situations where agreeing to loan modifications with the debtor will allow ongoing payments to resume, and a creditor may be able to avoid the financial losses and complications related to collecting debts.

Benefits and Drawbacks of Different Debt Collection Methods

Following a default, creditors may have a number of different options for collecting debts, including:

• Using a debt collection agency - Sending a debt to collections may allow a creditor to receive payments, but this can take time as debt collectors attempt to contact debtors and set up payment arrangements. A debt may also be sold to a collection agency or another company, although this will often result in a loss.
• Foreclosure - If a debtor has defaulted on a home mortgage, a creditor may be able to take possession of the home and sell it through an auction. This may allow a creditor to be repaid for a significant portion of the loan, but it can be a lengthy and complicated process.
• Repossession - A debtor's failure to make payments on an auto loan or other types of loans may allow a creditor to take possession of property and sell it. This may allow a creditor to recover some of the loan amount, but it can be difficult to sell the property for its full value, especially if depreciation has occurred.
• Pursuing a legal judgment - A creditor may pursue litigation against a debtor, and a civil court may allow for multiple methods of collecting what is owed, such as wage garnishment, liens on property, or seizing a debtor's bank account. However, this process will involve legal fees and other expenses, and if a debtor files for bankruptcy, the ability to pursue a judgment may no longer be possible.

Options for Loan Modifications

To avoid the losses that may be associated with collecting debts, creditors may allow for modifications to a debtor's loan. These modifications may include:

• Forbearance - A creditor may agree to allow a debtor to make reduced or no payments for a set period of time. This may be an option in cases where debtors are experiencing financial hardship but expect their circumstances to improve in the future. Payments may be added to the end of a loan's term, or arrangements may be made to temporarily increase payments after a forbearance period has ended.
• Capitalization of arrears - Missed payments and associated fees and penalties may be added to the principal of the loan, allowing them to be paid off along with the rest of the balance.
• Extensions of a loan's term - A creditor may agree to extend the loan's term, which may lower monthly payments and make them more affordable for the debtor. This will also result in additional interest being paid over the life of the loan.
• Interest rate modifications - A creditor may agree to lower the loan's interest rate, which will reduce monthly payments. In some cases, a creditor may also agree to convert an adjustable-rate loan to a fixed-rate loan. These changes may ensure that a debtor will be able to make continuing, affordable payments.

Contact a Chicago Creditor Loan Modification Lawyer

Each situation will be different, and creditors will need to weigh the pros and cons of debt collection and loan modifications. An attorney can help creditors understand their rights and options and help them find solutions that will protect their interests. To get legal help and representation in matters involving creditors' rights, contact the Illinois debt collection attorneys of Dimand Walinski Law Offices, P.C. at 312-704-0771 and arrange a consultation.

Sources:

https://www.thebalance.com/loan-modifications-315514

https://www.thebalance.com/loan-modification-vs-refinancing-which-should-i-use-5208928