Debt Forbearance: Pros and Cons
6 MIN READ
Published April 07, 2023 | Updated October 02, 2023
Debt forbearance can help you temporarily postpone your payments when you are dealing with an unexpected financial challenge. Learn more about how it works, if you are eligible, and whether this is the right option for you.
If you are a borrower or a homeowner experiencing financial hardship, there are many ways to deal with your debt. Debt forbearance is an option that will allow you to postpone your financial obligations to a later date.
Whether you are facing hardships because of natural disasters, illness, injury, the pandemic, or unemployment, debt payments can be a major source of worry. Fortunately, debt relief can provide you with the solution you need so you can get back on your feet. Before applying for a debt forbearance program with your lender, take the time to understand how this option works.
What Is Debt Forbearance?
Debt forbearance refers to a payment pause on your loan for a fixed period of time, typically for federal student loans and mortgages. If you are dealing with credit card debt or auto loan debt, many lenders offer similar options. Lenders often grant forbearance to borrowers at risk of default and foreclosure.
Typically, debt forbearance comes without additional penalties or fees, but you’ll need to demonstrate financial hardship to qualify for most programs. You can contact your service provider or your lender to discuss the financial difficulties you are facing. It is important to note that debt forbearance is not the same as loan forgiveness. You will still need to repay the missed payments at the end of the forbearance.
Debt forbearance agreements will be negotiated between the borrower and lender. If you have a good payment history and credit report, you are more likely to be approved for forbearance.
Debt forbearance plans typically last for three to six months. You may be able to ask for an extension at the end of this period. Depending on the nature of your loan, you may be eligible for up to 18 months of debt forbearance.
When To Apply for Debt Forbearance?
Apply for debt forbearance if you are facing financial hardship due to unexpected events such as:
- Reduced income, layoff, or failure of a business
- Long-term disability or serious illness
- Divorce or death of a primary income earner
- Accidents or natural disasters
You will need to contact your loan servicer or lender to apply for debt forbearance on mortgages or student loan debt. You’ll need to fill out an application and demonstrate financial difficulties to qualify for the assistance program.
Check Studentaid.gov to see if you qualify for student loan repayment plans. The U.S. Department of Education offers several programs under which you may be eligible, especially if you are a teacher or work in public service.
Qualifying student loan borrowers may be eligible for many student loan relief programs, such as income-driven repayment plans, loan consolidation, and more. Loan consolidation, income-driven plans, and other loan repayment plans can help you manage your student loans while you navigate financial hardship.
Pros and Cons of Debt Forbearance
Although getting a chance to put a pause on debt repayments can seem like a big relief, it is important to consider all the pros and cons to make an informed decision.
- It reduces your risk of defaulting on your loans. With the opportunity to pause mortgage and student loan payments, you have a better chance to avoid defaulting.
- It helps you avoid foreclosure. During the term for payment relief, your personal assets will not be seized by the lender.
- It allows you to focus on your necessities, such as medical bills, utilities, and food during challenging times instead of stressing over mortgage debt.
- It doesn’t negatively impact your credit scores.
- It may be difficult to satisfy the eligibility criteria for debt forbearance. You’ll have to demonstrate financial hardship by providing documents such as medical bills.
- During the payment relief term, your debt will continue to accrue interest. This interest will be added to your outstanding loan balance, so you’ll have even more to pay at the end of the term.
- If you have missed payments before setting up loan forbearance with your lender, it will likely have a negative impact on your terms.
Life After Debt Forbearance Ends
After the debt forbearance term is over, you will be responsible for making up the missed payments. It’s important to remember that forbearance does not mean forgiveness, and you need to determine how to pay back the debt you owe still. A good strategy is to work with your lender to come up with a plan to repay the accumulated debt.
You don’t need to pay the entire amount back at once. Some of the options that may be available to you are:
- Loan modification
- Payment deferral
- Repayment plan
If you have a loan backed by Freddie Mac, you’ll never be required to pay back the amount in a lump sum. Depending on the terms you negotiated with your lender, you may have to pay back the accrued interest charges.
Debt Forbearance Vs. Bankruptcy
Debt forbearance allows you to temporarily pause debt payments for a few months. It does not result in the cancellation of debt. At the end of the forbearance term, you’ll still need to repay the amount you owe along with the accrued interest amount.
Bankruptcy can help you erase most types of unsecured debts if you are eligible. It is a last resort option and should only be considered if you have exhausted all other options, such as debt settlement.
Bankruptcy can negatively impact your credit report for 7 to 10 years.
Debt Forbearance Vs. Deferment
Debt forbearance means temporarily pausing loan payments. With this option, your loan will continue to accrue interest.
Debt deferment also involves temporarily pausing monthly payments, but with this option, the interest rate will not continue to accrue.
Debt forbearance is a temporary debt relief option that can help you in times of need. To successfully overcome your financial hardship, make a plan to determine how you’ll repay your debt at the end of the forbearance term.
TurboDebt is a reputed debt relief company that can help you find a way out of debt. Our counselors can provide strategic planning, advising, and consulting services so you can find a debt relief program that is right for you. Connect with us for a free consultation today.