[author: Win Mims]

A recent bankruptcy court decision illustrates a common forbearance problem. After missing three consecutive mortgage payments, debtors entered into a Mortgage Forbearance Plan (MFP) with their lender. The plan provided for reduced mortgage payments for six months. The court found that "the parties anticipated that at the end of the six months, the lender would review the debtor's request for a loan modification". After the end of the six months, the lender DENIED the loan modification. This scenario, or some part of the scenario, has been all too familiar to many of our clients and caused our clients to either have to file a Chapter 13 case to keep their home or to file a Chapter 7 case to surrender the home and wipe out their debt to the lender.

In this case, the debtors filed a Chapter 13 case to keep their home; however, the lender argued that all of the unpaid mortgage payments during the MFP must be paid through debtor’s plan which would significantly increase the debtor's plan payment! The good news for the debtors was that the lender's MFP was not clear as to when any such pay-back must be made. As a result, the court ruled that the balance of the monthly payments reduced by the MFP would be due at the "back-end" of the note and not "immediately".

Follow a few simple steps to protect yourself:

  • READ and get a copy of any MFP you enter into with a lender.
  • CONSULT with an experienced attorney before signing any agreement.
  • ASK what happens at the end of any forbearance agreement to the balance of the monthly payments REDUCED or FORGIVEN during the MFP.

In this case, the debtors "got lucky".