If I were to get into a life situation where I would not be able to make regular payments, do lenders typically provide options other than default?

Question

Lets say I had a home loan and suddenly lost my job. I have a few months savings, but for whatever reason am aware that I will not be able to make regular payments and will default on my house if I can't agree to do something else with the bank. For the sake of this argument, assume that I know with 100% certainty that I am stuck in a situation where I will not be able to continually make regular payments -- My only solution is to either default or shed the debt in some other way.

Do lenders typically have resolutions for this that do not lead to default? Assume I have some savings so I can keep making payments for a limited amount of time, but not enough to completely pay the debt through normal means.

Edit: Just to clarify, this is a hypothetical (thank goodness!)

Answer 1

I would say generally, the answer is No.

There might be some short term relief to people in certain situations, but generally speaking you sign a contract to borrow money and you are responsible to pay. This is why home loans offer better terms then auto loans, and auto loans better than credit cards or things like furniture. The better terms offer less risk to the lender because there are assets that can be repossessed. Homes retain values better than autos, autos better than furniture, and credit cards are not secured at all.

People are not as helpless as your question suggests. Sure a person might lose their high paying job, but could they still make a mortgage payment if they worked really hard at it? This might mean taking several part time jobs. Now if a person buys a home that has a very large mortgage payment this might not be possible. However, wise people don't buy every bit of house they can afford.

People should also be wise about the kinds of mortgages they use to buy a home. Many people lost their homes due to missing a payment on their interest only loan. Penalty rates and fees jacked up their payment, that was way beyond their means. If they had a fixed rate loan the chance to catch up would have not been impossible.

Perhaps an injury might prevent a person from working. This is why long term disability insurance is a must for most people. You can buy quite a bit of coverage for not very much money.

Typical US households have quite a bit of debt. Car payments, phone payments, and either a mortgage or rent, and of course credit cards. If income is drastically reduced making all of those payments becomes next to impossible. Which one gets paid first. Just this last week, I attempted to help a client in just this situation. They foolishly chose to pay the credit card first, and were going to pay the house payment last (if there was anything left over). There wasn't, and they are risking eviction (renters).

People finding themselves in crisis, generally do a poor job of paying the most important things first. Basic food first, housing and utilities second, etc... Let the credit card slip if need be no matter how often one is threatened by creditors. They do this to maintain their credit score, how foolish.

I feel like you have a sense of bondage associated with debt. It is there and real despite many people noticing it. There is also the fact that compounding interest is working against you and with your labor you are enriching the bank. This is a great reason to have the goal of living a debt free life. I can tell you it is quite liberating.

Answer 2

For insight on what will happen, I suggest looking at the situation from the lender's perspective:

If your setbacks are temporary, and you are likely to get back on your feet again, they will protect their investment by making accommodations, and probably charging you extra fees along the way.

If your financial hardship seems irredeemable, they probably try to squeeze you for as much as possible, and then eventually take your house, protecting their investment as best they can.

If they are going to foreclose, they may be reluctant to do it quickly, as foreclosure is expensive, takes man power, and looks bad on their books. So it may get pushed off for a Quarter, or a fiscal year.

But if you are asking if they'll help you out from the goodness of their heart, well, a bank has no heart, and creditors are interested in ROI. They'll take the easiest path to profit, or failing that, the path to minimum financial losses. The personal consequences to you are not their concern.

Once you realize this, it may change your thinking about your own situation. If you think you have a path to financial recovery, then you need to make that clear to them, in writing, with details. Make a business case that working with you is in their own best interests.

If you cannot make such a case, recognize that they'll likely squeeze you for as much as possible in penalties, fees, interest payments, etc, before eventually foreclosing on you anyway. Don't play that game. If your home is a lost cause financially, plan how to get out from it with the smallest losses possible. Don't pay more than you need to, and don't throw good money after bad.

Answer 3

The answer is generally yes.

Depending on your circumstances and where you live, you may be able to get help through a federal, state, or lender program that:

• provides temporary financial assistance to help cover your monthly mortgage payments
• gives you a break from making payments altogether until you get back on your feet, or
• modifies your loan to permanently reduce your monthly mortgage payments.

Answer 4

Some lenders will work with you if you contact them early and openly discuss your situation. They are not required to do so. The larger and more corporate the lender, the less likely you'll find one that will work with you.

My experience is that your success in working out repayment plan for missed payments depends on the duration of your reduced income. If this is a period of unemployment and you will be able to pay again in a number of months, you may be able to work out a plan on some debts.

If you're permanently unable to pay in full, or the duration is too long, you may have to file bankruptcy to save your domicile and transportation. The ethics of this go beyond this forum, as do the specifics of when it is advisable to file bankruptcy.

Research your area, find debt counselling. They can really help with specifics. Speak with your lenders, they may be able to refer you to local non-profit services. Be sure that you find one of those, not one of the predatory lenders posing as credit counselling services. There's even some that take the money you can afford to pay, divide it up over your creditors, allowing you to keep accruing late/partial payment fees, and charge you a fee on top of it. To me this is fraudulent and should be cause for criminal charges.

The key is open communication with your lenders with disclosure to the level that they need to know. If you're disabled, long term, they need to know that. They do not need to know the specific symptoms or causes or discomforts. They need to know whether the Social Security Administration has declared you disabled and are paying you a disability check. (If this is the case, you probably have a case worker who can find you resources to help negotiate with your creditors).