A forbearance agreement is a written contract between a borrower and a lender in which the lender agrees to refrain-forbear-from exercising a legal right against the borrower that the lender is legally entitled to exercise for the repayment of a debt. The lender agrees to forbear from suing the borrower or filing foreclosure documents in exchange for the borrower’s agreeing to a revised repayment schedule. Forbearance agreements are short term solutions and not used when the borrower has more long term debt troubles.

Forbearance agreements allow for breathing room and time for reflection and discussion.

Forbearance agreements:

• Give the lender the chance to cure deficiencies in its financial documents (lender benefit).
• Preserve any defaults or remedies (lender)
• Secure a release of claims arising from actions previously taken on the credit (lender).
• Provide more time for the debt repayment (borrower benefit).

Some of the common elements of forbearance agreements include:

• Confirmation of a debt;
• Confirmation of the lender’s interest in certain collateral;
• The lender’s consent to forbear;
• Acknowledgement that the borrower has no defenses or liabilities against the lender;
• Preservation of the lender’s defaults and other rights against the borrower;
• Affirmative and negative covenants;
• Certain conditions - adherence to the new payment schedule; agreement to sell inventory or other assets; or promise to seek the advice of a financial advisor, and
• “Drop dead” clause - the date by which the borrower must be current on the payments or else the lender will pursue legal action.

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