The lender’s straightforward response to a loan default is to start the foreclosure process. However, many lenders would instead take a different approach and try to modify the debt in the hopes that the borrower can resume payments. Loan modification and forbearance are the two most popular restructuring techniques.

The fundamental goal of a post-default loan modification is to change the loan terms because if the conditions mentioned above persist, the borrower will be forced into default. In contrast, a forbearance agreement is a promise made by the lender to postpone starting or continuing foreclosure proceedings for a predetermined period even when the debt is still in arrears.

Making the correct choice between these two alternatives is a matter of strategy and tactics for the lenders. Here is an overview of how both alternatives affect the different aspects of a loan.

  1. Default Status: If a lender decides to modify a loan after a default event, the default will stay withdrawn after the modification is put into place. Alternately, previous defaults will continue to be due if the lender chooses the forbearance option.
  2. Acceleration: Even if a loan had previously been accelerated, a loan modification would remove the acceleration, just like in a situation of default. On the other hand, forbearance usually results in a loan continuing to be accelerated. Acceleration permits the lender to take instant possession of the whole debt, which may cause conflict if the borrower declares bankruptcy.
  3. Maturity Date: As with any other clause of the original loan contract, a loan modification may change the maturity date of a loan. Since the debt remains in default during the forbearance term, there would be no official modification to the maturity date in a forbearance agreement. A forbearance would specify a new date on which the lender might start or continue the foreclosure process rather than altering the maturity date.

Both modification and forbearance can be accommodating in resolving issues during the loan. To read more about their impacts on the loan, click here.