Alternatives to Bankruptcy
I have seen several options offered by lenders in restructuring an existing mortgage loan. The first is a repayment plan, wherein a borrower is urged to get back on track by making current mortgage payments coupled with a portion of their arrearage. Typically, the debtor is asked to make installments of one and a half times their regular monthly payment over a period of months. This is probably the easiest to arrange with the lender and was one of the only options available during the beginning of the current crisis. The trouble with this option, though, is that most people who are currently behind on their mortgage now do not have the extra income necessary to make must larger payments. That, after all, is how they found themselves in arrears in the first place.
The second option is a forbearance agreement, whereby the lender agrees to postpone mortgage payments for a period of time. These missed payments are often added onto the back of the loan and the term extended for the number of months deferred. This kind of workout is most common where a debtor has been laid off temporarily or called to active duty.
Finally, loan modifications involving lower interest rates and hence lower monthly payments have been on the rise. These have been necessary due to the continuing infeasibility of the prior two options in cases where homeowners have been laid off indefinitely, have been unable to afford their obligations from the outset due to predatory lending, have variable rate loans whose interest rates have re-set to unaffordable levels, or whose household expenses have suddenly increased (e.g., due to children moving home or a major medical event). This alternative is probably all that is available for debtors who can’t afford their current mortgage payments and there is little prospect that they will be able to afford them in the future.
There are other strategies that may be available in unusual circumstances, including extending loan periods beyond 30 years, converting from a variable to a fixed interest rate, and completely re-negotiating the entire loan for a new term and at a new interest rate.