When a borrower defaults and asks for extra time to correct the problem, lenders often consider a forbearance arrangement instead of moving directly to foreclosure. Forbearance can serve both sides well, but only when the agreement is drafted with precision. A strong agreement preserves the lender’s rights while giving the borrower a clearly defined path to cure. The following provisions are fundamental.
What Forbearance Involves
Forbearance is not a waiver, nor is it a modification. The borrower remains in default. The lender simply agrees to pause its enforcement efforts for a set period while the borrower completes certain required steps. This distinction is important: a waiver would eliminate the existing default and require the lender to wait for a new one before taking action. Under forbearance, failure to comply with the agreement allows the lender to immediately resume enforcement.
Six Clauses That Every Forbearance Agreement Should Contain
1. Borrower’s Confirmation of Default and Waiver of Any Claims
The borrower must confirm that the loan is in default, identify each specific default, acknowledge the loan balance, and recognize the lender’s right to accelerate and foreclose. The borrower should also waive all defenses, setoffs, and counterclaims. This prevents later arguments that no default existed or that the lender’s willingness to forbear undermines the default. Agreements often state explicitly that the lender could accelerate and foreclose absent the forbearance.
2. Clear Borrower Obligations with Measurable Deadlines
The borrower’s responsibilities during the forbearance period must be precise and tied to firm dates. Examples include making specific monthly payments, delivering financial statements within a stated timeframe, or listing collateral for sale at a defined minimum price by a particular deadline. Obligations such as “improve cash flow” are too vague. The lender must be able to point to objective criteria to determine compliance. If the borrower misses any requirement, the forbearance ends immediately.
3. Events That Automatically End the Forbearance
The agreement should specify that certain events terminate the forbearance automatically and without any notice. These events typically include failing to make a required payment, committing a new default under the loan documents, making material misrepresentations, filing for bankruptcy, or having creditors file suit or liens against collateral. Once termination occurs, the lender is free to pursue all available remedies. The forbearance itself is the borrower’s opportunity to cure—no further grace period is needed.
4. A Specific End Date for the Forbearance Period
Every forbearance agreement needs a defined expiration date, usually 120–180 days from the start, unless terminated earlier under the agreement. The lender may choose to extend the period later, but the agreement should never be open-ended. Avoid duration language tied to uncertain future events, as that gives borrowers indefinite time and leaves the lender without control.
5. Safeguards That Maintain or Improve the Lender’s Position
Throughout the forbearance period, all collateral and security interests should remain fully in effect. The borrower may be required to provide additional collateral or guarantees, deliver monthly financial reporting instead of quarterly statements, supply updated collateral valuations, and cooperate fully with any sale or refinancing efforts. The lender should also retain the right to inspect collateral and business operations. All attorney’s fees, costs, and expenses must be added to the loan balance and secured by existing collateral, without any requirement that fees be reasonable. Forbearance should enhance the lender’s protections—not diminish them.
6. Explicit Statement That Loan Terms Are Not Amended
The agreement must clarify that it does not waive defaults, change any loan terms, obligate the lender to extend forbearance beyond the defined period, reduce interest rates, extend maturity dates, or limit enforcement rights. Borrowers may later argue that a forbearance arrangement suggests ongoing negotiation or relaxed enforcement. Clear language removes that argument. Modifying interest or maturity would be a formal loan modification requiring approval and could affect loss reserves, so such changes should not be part of the forbearance.
When Forbearance Makes Sense
Forbearance is appropriate when the borrower has a realistic plan to cure, when collateral still exceeds the amount owed, when the issue appears temporary, and when the cost of forbearance is lower than the cost of immediate foreclosure. It should not be used when the borrower is insolvent with no viable recovery strategy, when collateral is insufficient, when assets are being diverted or mismanaged, or when delay will worsen the lender’s position.
Conclusion
The lender begins from a position of strength: the borrower is in default, and foreclosure is an available remedy. Forbearance is a voluntary accommodation, not a requirement. Avoid vague terms, indefinite timeframes, and any limits on enforcement rights. A well-drafted forbearance agreement gives the borrower a structured chance to fix the default while preserving the lender’s ability to act swiftly if those obligations are not met.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. It may not apply to your particular circumstances. Reading this article or contacting the author does not create an attorney-client relationship. Please consult a qualified attorney for advice regarding your situation.
About the Author:
David A. Lutz owns Lutz Law Firm in Minneapolis, representing financial institutions, businesses, and individuals in banking law, secured transactions, and commercial litigation. He can be reached at david@lutzlawfirm.com or 612-424-2110.
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