Many Americans contact the companies servicing their secured and unsecured debts when they experience hardships. Borrowers often choose to apply for a temporary pause in monthly payments to get through an unexpected financial issue.
As reported by CNBC, more than 25% of loan and credit card holders turned to payment deferrals to help deal with financial issues. While offering an opportunity to catch up on bills, this approach may not provide the outcomes many individuals hope for, even if they have a steady income.
The deferment period may not last long enough to recover
The Consumer Financial Protection Bureau notes that a mortgage-payment forbearance, for example, generally lasts between three and six months. After the payment pause, the mortgage servicer may require a balloon payment.
If an individual cannot afford a balloon payment, the mortgage may need refinancing. The borrower may, however, have also fallen behind on credit card or medical bills. This may have brought about a lowered credit score. Refinancing a mortgage may prove difficult or require a co-signer.
Bankruptcy may avoid both creditor lawsuits and foreclosure
After a certain period of non-payment time, credit card companies may file legal actions. These may include wage garnishments or property liens. Auto financers may attempt repossession and a mortgage company may obtain a court order to foreclose on a property.
As described by Credit Karma, filing for bankruptcy triggers an automatic stay. Creditors no longer have a right to contact debtors about their outstanding debts while the stay remains in effect.
Bankruptcy may provide reasonable options to debtors facing financial challenges. A filing may also allow a borrower to keep their home while working with the court to manage outstanding obligations.