When a borrower defaults under a loan agreement, a lender has several available options. For example, the lender can file a lawsuit and seek to foreclose or repossess collateral, negotiate a modification of the loan documents, or enter into a forbearance agreement. In many cases, the lender will agree to forbear from pursuing its legal remedies for a short period of time to allow the borrower to cure the default and meet other requirements of the lender.
When entering a forbearance agreement, the lender should consider certain factors:
- Due diligence. The borrower’s financial condition should be reviewed prior to entering into a forbearance agreement. This includes conducting a search of all tax liens and judgments against the borrower, as well as an onsite audit to verify the location and condition of all collateral pledged under the original loan.
- Clearly identify purpose of contract. The lender must clarify that the agreement is not amending the original loan terms other than as specifically set forth therein and should reiterate that the maturity date is not being extended. This preserves the lender’s right to accelerate repayment or to charge a default rate of interest if the original agreement provided therefor.
- Basic terms. The contract should specify the amount of the debt and outline all monetary and non-monetary defaults of the borrower and any guarantors. The borrower and all guarantors must be parties to the forbearance agreement. If the forbearance agreement is entered into after the original loan has matured, the terms of the agreement generally provide that the borrower must repay the loan in installments over a specified period of time, usually at a higher interest rate than in the original loan agreement.
- Additional terms. The lender often imposes additional terms that must be met in a forbearance agreement. This includes pledging additional collateral to the benefit of the lender.
- Original loan terms still enforceable. The lender’s forbearance should be conditioned upon strict compliance with all remaining obligations under the original loan agreement. Thus, any new default under the original loan is an automatic default under the forbearance and gives the lender the right to terminate the forbearance agreement.
- Release of liability. The lender should require the borrower and guarantors to release the lender of any liability associated with the original loan agreement or forbearance contract.
For further information regarding forbearance agreements, contact the legal team at Parker Ibrahim & Berg LLC.