By: Robert J. Nahoum
THE PROBLEM
Our economy has stopped dead in its tracks. As of this writing, unemployment claims have exceeded 16 million. Even those who are still working, whether from home or in the field as an essential worker, are terribly anxious about what the economic future will bring.
We sit at our kitchen tables trying to figure out how to pay the bills at same time our incomes are disappearing. Unemployment checks are insufficient. Stimulus money from the government is not enough. Our savings are not enough. What will we do? Which bills must get paid first?
Fortunately, some of the companies on which rely are stepping up and offering relief to their customers. That relief often is coming in the form of a payment “forbearance†or “defermentâ€; but what really are forbearances and deferments?
The legal definition of a forbearance is:
Simple enough, right? Well, as with most things, the devil is in the details. Questions that this definition fails to answer are:
- What about interest?
- What about credit reporting?
- How long is the forbearance?
- Will I have to pay 100% of what I owe at the end of the forbearance?
INTEREST
In most instances deferments and forbearance differ only to the extent that deferments are interest free while forbearances continue to accrue interest during the forbearance period.
In most forbearances, finance charges (interest) continue to accrue during the forbearance period. Take for example your car loan – if you have a car loan of $30,000.00 at a rate of 5% interest for 5 years, your monthly payment is about $566. Of that $566, your average interest payment is $66.00[1]. So, if you are granted a 180-day forbearance on your car payment, your auto loan may cost you an additional nearly $400.00.
CREDIT REPORTING
Federal law called the Fair Credit Reporting Act (FCRA) regulates credit reporting, credit reporting agencies and the creditors that report to the credit agencies. The law generally requires that if a creditor reports credit, it must report it honestly. That means, if you have a credit account in forbearance, it must be reported as such. To be sure, a credit account reported as in forbearance is better than being reported as delinquent. However, is it better than being reported as paid on time?
THE FORBEARANCE PERIOD
The length of the forbearance period will impact a variety of outcomes. The longer the period, the longer you get the monthly payment relief. At the same time, the longer the period the larger the bag you will be holding at the end of the deferment.
WHAT WILL YOU OWE AT THE END OF THE FORBEARANCE?
If the forbearance is like turning on a and off a light switch for payments, how much will you owe when the forbearance is over? Let’s say for example your cell phone company is offering a 3-month payment forbearance during the corona-economy and you have a $200 monthly cell phone bill. At the end of the 3 months will you immediately owe $600.00? Will you have the $600 to pay?
If we can be sure of anything it is this – creditors will not simply forget that they are owed money. At some point, they will want to be paid.
True, you can’t get blood from a stone. Our creditors know this better than anyone. Offering a forbearance or deferment is a good business decision for them. At the same time, living to fight another day is not a bad financial strategy for corona-economy victims. Is this a win-win situation for us and them? Perhaps it is. The future is uncertain. The best we can all do now is to stockpile knowledge and make our economic decisions from an informed position.
Be safe and take care of each other.
If you need help resolving a consumer legal, contact us today to see what we can do for you. The Law Offices of Robert J. Nahoum, P.C
(845) 232-0202
[email protected]
[1] The amount of your monthly payment that goes to interest varies depending on how far along you are on the obligation. The newer the loan, the more in interest you are paying. Conversely, the older the loan, the less in interest.