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Falling behind on payments and its financial implication

Most of us at one time or the other had a situation where we fall behind on payments. The reasons may be too many to be listed here but the feelings and the emotions one goes through in the event of such a situation is usually the same. The question is what to do.

Possible Options

In the first place you can consider calling the lender and letting him know of the financial difficulty you are placed in. In all probability the lender may consider what is called a ‘forbearance program’, whereby you are allowed to suspend payments till you tide over your temporary financial crisis. Once you have regained your financial strength ,the unpaid amount referred to as arrearage will be added to your monthly payment and paid off. Or there can be a modification of a loan, meaning, the monthly payments can be reduced.

If you have some equity, may be in the form of a house, then you can consider taking a home equity loan to pay off the debt.

Is it Honestly Time To Sell Fast?

If the crisis is permanent then the borrower may consider Short Sale - a sale where the sale proceeds are not enough to meet the debt in its entirety - with the lender accepting the loss with no legal action against the borrower. Or you can try a deed in lieu of foreclosure as an option where the borrower hands over the title deeds of his property to the lender in lieu of payment in full, though the worth of the property may be less. Foreclosure can be dumped as the final straw and should be considered only after exhausting all other options since it is a loss for both the lender and the borrower.

There is a distinction between foreclosure and a deed in lieu of foreclosure which needs to be clearly understood. Where a lender has accepted a deed in lieu of foreclosure and the later sells the house and the house thus sold has a lien, then the new owner can sue the lender. However if the sale is by foreclosure then all liens in respect of that property stand cancelled.

Foreclosure by itself is not a pleasant experience. And for a person who has gone through it, the nightmare does not end. Like rubbing salt over a wound, he is liable to pay capital gains tax.

Once you fall behind on payments it is time to immediately take necessary steps to contain the damage and for some introspection. You may need to honestly and objectively analyse how you got in the situation and realistic solutions- denial is one of the leading causes people go into foreclosure and are forced to leave there home on someone elses terms.

In all probability, the reason may be over-leveraged credit. Credit is a very difficult instrument to handle, akin to a double edged knife. So, credit should be handled judiciously lest you fall into the most dangerous trap – the debt trap.

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