As defaults continue to rise, it’s important for lenders and creditors to understand their rights in bankruptcy court. If you are owed money from a borrower who filed for bankruptcy, contact Kahana & Feld LLP to discuss your legal options.
Bankruptcy eliminates debt and stops foreclosures, repossessions, wage garnishment and debt collection activities. However, it can also cause problems for those who co-signed a loan.
1. Communicate With Your Lender
When you fall behind on your loan payments, it’s important to reach out to your lender as soon as possible. Lenders may be willing to restructure your loan or enroll you in a deferment program. These programs can pause your payment obligations for a period of time, but interest continues to accrue.
A creditor typically considers you in loan default when you’re late on your payments for a certain amount of time, which varies by loan type. While a first missed payment may result in late fees and a temporary impact on your credit, loan default can lead to legal action, wage garnishment, asset seizures and more.
Once a debt enters default, you will begin to receive collections calls from your original creditor or a collection agency that the creditor has sold or transferred your account to. You may also start receiving letters or emails from the debt collectors demanding repayment.
2. Ask for Help from Family
Often, loan default occurs because borrowers don’t have the income to support their repayment schedules. It is not uncommon for people to turn to friends and family for financial assistance in these circumstances. While asking family members for money can be awkward, they are often more than willing to help if the amount is reasonable and the terms of the loan are clear.
Be sure to ask for exactly what you need, and be clear if it’s a gift or a loan. If it’s a loan, discuss with them what interest rate they are comfortable charging (if any) and the repayment timeline.
Explain the steps you have already taken to try to solve your debt problem. They will likely be more receptive if they see that you have tried other options before seeking their help.
3. Negotiate With Your Lender
A loan default happens when a borrower fails to make their required payments over an extended period of time. In addition to financial penalties like credit report damage and a drop in your credit score, you may also be subjected to collection efforts that can include wage garnishment or seizure of collateral pledged against the debt (typically for mortgages, auto loans and personal loan obligations).
It’s important to keep in contact with your lender – especially if you think you might miss a payment. Your lender may be able to enroll you in a repayment program, defer your payments or adjust your loan terms to suit your circumstances.
For personal loans and credit cards, your debts might be forgiven in bankruptcy depending on your circumstances. However, a Chapter 7 bankruptcy can have serious consequences that affect your ability to obtain credit, travel overseas and find employment.
4. Consider a Loan Modification
A loan modification is a change in the terms of a mortgage or other secured debt to make payments more affordable. It could involve adding missed mortgage payments to the loan balance, deferring principal, lowering interest rates or changing the type of mortgage. A home loan modification can help you avoid foreclosure and rebuild your credit.
You may need to provide proof of financial hardship such as pay stubs, bank statements, and tax returns to qualify for a loan modification. However, many lenders will agree to a loan modification rather than go through the costly process of foreclosure. Each situation is different and lenders have their own programs that offer assistance. Some examples include the Freddie Mac and Fannie Mae Flex Modification programs. A debt consolidation loan may also help reduce your monthly payments by combining multiple loans into one.
5. Consider Bankruptcy
Bankruptcy is the nuclear option for debt relief, but it also has a negative impact on your credit. It stops creditors from foreclosing on your home or repossessing your car and eliminates some types of debt. It also prevents wage garnishment and debt collector harassment, but it stays on your credit record for 10 years and makes obtaining a loan difficult. Before considering bankruptcy, weigh your options carefully and consider consulting a financial advisor specializing in this area.
Alternatives to bankruptcy include debt management programs, debt settlement and credit counseling. However, these all have a negative effect on your credit score and none of them guarantee complete elimination of debt. In addition, some of these alternatives require that you surrender assets like your home or car to pay off your debts.