The COVID pandemic affected all aspects of our society, culture and economy. Debtor/creditor relationships are no exception. Workers had reduced hours or were laid off because COVID restrictions forced business to reduce operations or even close. Many workers owed mortgage loans, car loans, signature loans, credit card and other debt. Given the economic effects of COVID restrictions, some creditors realized strictly enforced loans would lead to widespread defaults.
In response, some creditors created “COVID Relief” or “COVID Forbearance” programs which offered deferred loan payments. These programs may appear generous or altruistic, but perhaps not so much. For instance, many agreements provided that interest continues to accrue and required deferred payments paid in a lump sum. The best example I have seen in my bankruptcy practice went like this:
Debtor owes a mortgage loan. Debtor loses job due to COVID hardship and notifies lender of inability to pay mortgage. Lender tells debtor: “Let’s do a ‘COVID forbearance’ so you don’t have to make mortgage payments for the next 12 months.” Debtor fails to realize forbearance agreement requires that all deferred payments be paid in full at the end of the “COVID forbearance program” period.
The prospect of suspended payments is appealing if sufficient funds become available to make up missed payments. However, for debtors unable to accumulate funds to pay deferred payments and resume making full monthly loan payments, the outcome may be dire.
WHAT TO DO
To avoid potential pitfalls of a COVID relief program, here are some things you can do:
- CAREFULLY read the loan modification/forbearance/relief agreement (“loan agreement”) terms and make sure they explain when and how much you are expected to pay, when payments resume and how deferred payments are to be made;
- CAREFULLY consider how your specific circumstance might affect your ability to fulfill the future payment obligations imposed by the loan agreement;
- CONSULT with a financial advisor not affiliated with your lender if you do not understand any terms in the proposed loan agreement; and
- RE-EVALUATE your budget. If your loan payment disappears, you may be tempted to maintain or elevate your lifestyle with what appears to be “extra money.” DO NOT spend extra money elsewhere. Either set aside funds to assist with loan payments when they resume or send to lender to offset accrued interest and/or lower the amount needed to pay later.
WHAT TO EXPECT
- “COVID relief” programs may not protect your loan from going into a technical default because missed payments are missed payments, regardless of whether your lender agreed not to take action for a specified period of time;
- Your lender will recover all accrued interest and money owed under the loan terms (unless the loan terms are modified) as if there had never been any “COVID relief” arrangements;
- Payments missed during your “relief period” may be due and payable in full when the “relief period” expires (in some cases this could be thousands due in one lump sum); and
- Defaulting under the loan agreement could cause your lender to declare a default and commence to foreclose given the overvalued real estate market and lender unwillingness to provide further “assistance.”
If you have been negatively affected by a loan “COVID relief” program or are unable to pay the amount of deferred payments, filing a bankruptcy case may help. For instance, a chapter 13 case offers up to a 5-year period in which to pay a mortgage arrearage. I offer free consultations to help you determine if a bankruptcy case would benefit you.