How can a forbearance agreement stop my lender from foreclosing on my business?

A business runs into financial shortfalls for any number of reasons. Sales fall, customers drag their feet, or maybe a new venture that seemed like a sure thing costs more than expected. Cash can be tight for an individual, too. Loss of a job, illness, divorce - all of those can lead to sudden money problems. When these situations arise, the troubled debtor has options. Most important is the option to work out a deal with creditors. A direct deal can avoid bankruptcy, which is an even more punishing set of rules. One type of negotiated arrangement is called a forbearance agreement.

The Debtor May Agree to Certain Things

After the debtor has defaulted on a loan from a bank or other creditor and the creditor has commenced or threatened enforcement of the debt, the debtor may ask the creditor to forbear from pursuing a foreclosure sale, lawsuit or sale of collateral. In exchange for the forbearance, the debtor may agree to certain things.

• First, the debtor may agree to commence or resume making payments.
• Second, the debtor may provide additional collateral to the lender.
• Third, the debtor may agree to sell certain assets and apply the proceeds to reduction of the principal balance of the loan.
• Fourth, the debtor may agree to the acceleration of the due date of the loan.

These concessions are agreed by the debtor in order to reduce the likelihood that the creditor will suffer loss. In exchange, the creditor promises to forbear foreclosure, or judgment or exercise of “rights and remedies.” To forbear is to refrain from taking action.

More than Just These Things in a Forbearance Agreement

Creditors typically include more than just these things in a forbearance agreement. There are several others that are common.

• First, the debtor may be required to release the creditor. The debtor releases the creditor from any claims the debtor has or might have against the creditor.
• Second, the debtor may be required to waive a jury trial. Any future action the debtor might take against the creditor that is related to the forbearance agreement is limited to trial by a judge.
• A third is an acknowledgment. Here, the debtor recognizes that it owes a certain amount to the creditor and agrees not to argue later over the amount of principal, interest, or charges.
• Fourth, the debtor may have to waive certain defenses or counterclaims. This is common for loans between a bank and a commercial debtor. The debtor may agree, for example, that the bank has not interfered with the business or a property development.

A word of warning here. Collectively, these terms get the debtor to relinquish valuable rights.

But in most cases, a forbearance is an extremely valuable tool for a business or a person. The best deals are those in which the problem that caused the difficulty is short term.

Loan Modification

A forbearance may be made along with what is called a loan modification. This is a permanent change in the terms of the loan. It may occur when the creditor wants to have a long-term relationship with the borrower. A creditor will generally only agree to this arrangement if collecting the money later appears more likely than through a lawsuit or a sale of collateral.

Either way, creditors do not like to negotiate against themselves, so you won’t get an offer from the creditor first. Instead, the debtor comes to the lender with a proposal. Often that proposal will be in writing and will include financial information about the debtor’s income and operations.

Finally, be sure that the information you provide the creditor is accurate. The creditor is trying to get as much money from the loan as possible. So you don’t want to agree to more than you can actually do. Failure to successfully complete a deal will waste everyone’s effort, and over-promising will only hurt the debtor.