What Is Forbearance?

Features

A forbearance agreement, entered into when a borrower defaults on the payment agreement in the loan papers, provides temporary relief from financial obligations while the borrower is unable to pay. It prevents the holder of defaulted loans from taking legal action or reporting the default to credit reporting agencies negatively affecting credit scores. The agreement generally requires the borrower to resume payments or bring outstanding payments up to date at a specified time. The lender may restructure the payment arrangement to meet the ability of the borrower to repay the loan over an extended period.

Function

Forbearance agreements identify and document reasons for default and outline the plan of action to rectify the situation. The borrower generally assumes the responsibility of payments on the interest during the forbearance period or agrees that interest accrue during the forbearance increasing the amount of the loan obligation. Regular loan payments stop during the duration of the forbearance.

Identification

Applying for forbearance requires the borrower to present documentation of income and financial statements to substantiate the inability to meet the original repayment schedule. Evaluation of recent tax records, income and current financial obligations or special circumstances determines the ability of the borrower to meet the original loan agreement and forms the basis for a forbearance agreement.

Effects

The borrower is relieved of the financial obligation and is able to focus limited resources on living costs without the threat of foreclosure or demand of payment in full. This temporary injunction alleviates stress and allows the borrower the time needed to secure financial means to repay the loan.

Considerations

A forbearance avoids reports to credit agencies and does not negatively affect credit scores; however, a default does. Seeking a forbearance prior to entering a period of default will prevent reports to outside agencies and protect your credit rating from suffering the effects of a temporary loss of income or period of disability. It is imperative that borrowers contact the lending institution at the first sign of inability to meet repayment terms and enter into a forbearance agreement.