One last try before foreclosure or bankruptcy

Dear Bankruptcy Adviser,
How can you reach people before they file bankruptcy or go to credit counseling? As a loan officer, I know that people can get help before taking such extreme measures.
— Loan Officer

Dear Loan Officer,
Great question! People just do not understand that they have significant options other than filing bankruptcy or going to credit counseling. How do we reach them? Well, we have to overcome a great deal of fear and misinformation.

Fear exists, because many people feel that the creditor will not work with them at all. People think that the creditor will demand payment in full. And sometimes they do! As well, those folks in collections have been getting harassing letters and phone calls. So it is unlikely that someone will be willing to call the creditor to discuss a situation that they believe will not be resolved in their favor.

Misinformation comes from the type of letters creditors send and phone calls creditors make. Many creditors threaten legal action rather than informing the client of all the available options. An August 2005 survey by Freddie Mac shows that 61 percent of homeowners have no idea about their options to avoid foreclosure.

In writing about the survey, Kenneth R. Harney of The Washington Post Writers Group lists these four options:

  • Forbearance: Arrangements in which the mortgage company allows a borrower to pay less than the full amount owed per month, or even pay nothing, depending on the situation.
  • Reinstatements: Permit delinquent homeowners to balance out their accounts with the mortgage company at a future date, typically by paying a lump sum.
  • Repayment: Plans that allow partial contributions of arrears over an extended period of time, often as add-ons to the regular monthly payment.
  • Loan modifications: Change the basic terms of a mortgage account. Typically, these involve conversion of adjustable-rate mortgages into more affordable fixed-rate loans, rolling all missed payments onto the existing loan balance, or lengthening the term of the mortgage, giving the borrower more years to pay off the debt.

While the study addresses homeowners, people dealing with delinquent credit cards or personal loans also have the same alternatives.

It is important to note that many creditors will not be easy to work with. That is when someone like me would be a valuable resource. For a fee, an attorney can call your creditor and indicate that a bankruptcy is a viable alternative in order to get one of the more favorable arrangements described above. From my experience, a loan officer such as yourself would prefer that the debtor avoid bankruptcy. Therefore, using an attorney will give the individual confidence that a difficult situation can be resolved without bankruptcy or the use of debt management plans through a credit counseling agency.

Justin Harelik is a practicing bankruptcy lawyer in the Los Angeles office of Price Law Group. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.