There is a very specific difference in granting forbearance and amending the terms of a loan. For example, if the maturity date of a loan comes due and the debtor has not fully repaid the loan, the lender can change the terms of the loan to extend the maturity date. By making this amendment, the lender has ensured that the loan does not enter into default and that he or she keeps the terms of the loan in place. When the lender amends the loan, the debtor must still make payments according to the terms of the original loan. When a forbearance agreement has been issued, the parties temporarily put the terms of the loan on hold. By entering into a forbearance agreement, the borrower states that they have defaulted on the terms of the loan. However, through this agreement, they agree to resume the payments on the loan after the forbearance period. In return, the lender acknowledges the default but refrains from pursuing collections during the forbearance period. In many cases, the lender will attach certain conditions to the loan and the borrower for allowing the forbearance. These may include continued interest accrual during the forbearance period, repayments at a higher interest rate when the loan resumes, or additional security for the loan. If the borrower does not resume payments on the loan at the specified date, the lender will be able to sue for breach of contract and collect the debt on the loan under the terms of the original loan agreement.
Before granting forbearance, there will be a complete investigation of the financial standings of the borrower. In addition to checking finances and credit ratings, the lender should conduct a search for liens, tax liens, or other judgments against the borrower to gain a complete view of their finances. In addition, a survey will be conducted to ensure that all collateral is still in place to secure the loan. The forbearance agreement will contain many legal stipulations.
Loan Is in Default
First, it must contain the information stating that the loan in question is in default and that the borrower admits to this default. It must also include information that the lender is in full rights to claim a summary judgement against the borrower if the loan is not repaid. This gives the lender the right to collect on the debt if the forbearance is not honored.
Legal Conditions of the Forbearance
The next thing that you must include in this document is legal conditions of the forbearance. This will state that this contract is only in effect if the borrower agrees to, and honors all of, the conditions in the forbearance agreement. This section will also include information that states what will happen if the parties do not honor the forbearance agreement. In most cases, it will state that the loan will enter into default. Moreover, it will state that full collections on the loan will begin immediately.
Conditions of the Loan in Relation to Security
The third part of the agreement will specify any conditions of the loan in relation to security. If the loan was previously secured by property or goods, or if the forbearance requires a security deposit, the terms will be defined. The borrower must agree to all the terms and provide the necessary security before finalizing the agreement. All parties should carefully review this part of the agreement.
Release of Liability
The final section of the agreement will give a release of liability to the lender from all other parties. This release will cover any loss or damages caused by the forbearance agreement, loan documentations, or any other actions taken during the process. This section protects the lender from any “backlash” from the borrower.
What Are the Benefits of Forbearance?
Forbearance has many benefits for both the borrower and the lender. Lenders get an admission of default from the borrower. This admission will stand in court as a reason to collect the debt with aggression. The borrower, if granted forbearance, gets a second chance to pay off their debt without much damage to their credit history. Forbearance is not for everybody or applies in every situation. There must be a willingness and ability for the borrower to repay the debt at a later time for this type of legal action to work. If the debtor does not foresee the ability to repay in the future, or negates the deal, the creditor has their admission of default and can aggressively collect the debt.
In a forbearance agreement, the loan owner (“lender”) agrees to reduce or suspend your payments for a set amount of time. With a repayment plan, the lender temporarily increases your monthly payment by adding part of the overdue amount to your current payments so that you can get caught up on the loan. In a modification, the lender typically lowers your monthly payment and brings the loan up to date by adding any past-due amounts to the balance of your debt.
How Forbearance Agreements Work
While a loan modification is a permanent solution to unaffordable monthly payments, a forbearance agreement provides short-term relief for borrowers. With a forbearance, the lender agrees to reduce or suspend mortgage payments for a while. During the forbearance period, the servicer (on behalf of the lender) won’t initiate a foreclosure. In exchange, the borrower must resume making the full payment at the end of the forbearance period, and typically get current on the missed payments, including principal, interest, taxes, and insurance. You can usually:
• pay the amount in a lump sum
• add an extra amount to your regular payments each month until the entire skipped amount is repaid, or
• complete a loan modification (see below) in which the lender adds the unpaid amounts to the balance of the loan.
The specific terms of a forbearance agreement will vary from lender to lender. If a temporary hardship causes you to fall behind in your mortgage payments, a forbearance agreement might allow you to avoid foreclosure until your situation gets better. In some cases, the lender might be able to extend the forbearance if your hardship isn’t resolved by the end of the forbearance period to accommodate your situation. In a forbearance agreement, unlike a repayment plan, the lender usually agrees in advance for you to miss or reduce your payments.
Repayment Plans: Getting Caught Up on Past-Due Amounts
If you’ve missed some of your mortgage payments due to a temporary hardship, a repayment plan might provide a way to catch up once your finances are back in order. A repayment plan is an agreement to repay the delinquent amounts over time.
Here’s how a repayment plan works:
• The lender spreads your overdue amount over a certain number of months.
• During the repayment period, a portion of the overdue amount is added to each of your regular mortgage payments.
• At the end of the repayment period, you’ll be current on your mortgage payments and resume paying your normal monthly payment amount.
The length of a repayment plan will vary depending on the amount past due and on how much you can afford to pay each month, among other things. A three- to six-month repayment period is typical.
A Signed Modification Permanently Changes the Loan Terms
A loan modification is a permanent restructuring of the loan where one or more of the terms are changed to provide a (hopefully) more affordable payment. If you’re currently unable to afford your mortgage payment due to a change in circumstances, but you could make a modified payment going forward, this option might help you avoid a foreclosure.
How the Lender Adjusts Your Payment
With a modification, the lender might agree to do one or more of the following to lower your monthly payment:
• reduce the interest rate
• convert a variable interest rate to a fixed interest rate
• extend of the length of the term of the loan, or
• forbear some of the principal balance. (“Forbearing” the principal means setting aside a portion of the total debt before calculating your monthly payment. The borrower typically has to pay the set-aside portion in a balloon payment when refinancing or selling the home, or when the loan matures.)
Qualify for a Modification
Generally, to get a loan modification, you must:
• provide all required documentation to the servicer for evaluation (required paperwork will likely include a financial statement, proof of income, most recent tax returns, bank statements, and a hardship statement)
• show that you can’t make your current mortgage payment due to a financial hardship, and
• complete a trial period to demonstrate you can afford the new monthly amount.
A Forbearance Does Not Necessarily Stop Foreclosure
A forbearance agreement with the mortgage lender’s loss mitigation department usually does not take the borrower out of foreclosure. Forbearance simply causes the bank to “postpone” or “continue” the foreclosure sale until the payments are completely caught up. If the borrower does not comply with the exact terms of the forbearance agreement (a few days late, a few dollars short), the foreclosure sale takes place immediately (often within days). Forbearance agreements are essentially a way for mortgage lenders to squeeze more money out of a borrower. Due to the loose foreclosure laws, lenders often disguise a last grab at the borrowers’ money as a “workout plan” for the loan, knowing they will be foreclosing on the property anyway. Forbearance agreements are stacked against the borrower and almost always result in foreclosure. Most borrowers would be better off with just about any type of arrangement, other than a forbearance agreement. In rare cases, the lender may offer an affordable forbearance agreement, but it quite uncommon. Many of the Utah bankruptcy cases filed by this office are the result of borrowers entering into forbearance agreements with mortgage lenders without understanding the implications.
Who is Eligible for a Forbearance Agreement?
The lender’s goal in offering a forbearance agreement is to improve the chances of eventually receiving full payment, or at least a more significant amount than it could expect if it were to enforce the terms of the original loan documents. Generally if the business can establish that the cash flow problem is short-term and there is a substantial likelihood that timely payments will resume within an acceptable time frame or the loan be refinanced and paid in full, the lender will be more inclined to consider forbearance. On the other hand, if it appears to the lender that the company’s financial situation will only worsen and the best chance to minimize losses comes from pursuing its legal remedies immediately, a forbearance agreement is unlikely. Thus, one aspect of the request and negotiation regarding a commercial loan forbearance agreement will involve putting together a plan to demonstrate to the lender that the problem is short-term and that the company has a plan for stabilizing its finances and making good on the loan. Driving the debtor company into bankruptcy or dissolution is bad for the lender, but so is gambling on a business that is likely to deteriorate further rather than recover.
Negotiating a Commercial Loan Forbearance Agreement
When you request forbearance in connection with a commercial loan agreement, you are not asking a “yes” or “no” question. Rather, the lender’s willingness to consider forbearance opens a discussion of terms that will provide the lender with adequate protection while allowing the business room to recover.
Concessions to the Borrower in a Forbearance Agreement
The goal of the forbearance agreement is to allow the borrower to stabilize business operations and regain its ability to pay debts as promised. In order to achieve that, the lender will typically agree to forbear its right to accelerate the debt and to pursue other legal remedies for a specific period of time. Depending on the specifics of the situation, the lender may require partial payment of the delinquent amount or may waive or reduce payments for a specified time period. In exchange for these concessions, the lender will typically require certain actions and commitments from the borrower, which vary depending on several factors.
Concessions to the Lender in a Forbearance Agreement
The lender’s primary purpose in offering forbearance is not to help out the borrower. It is to maximize the lender’s recovery of the debt. Thus, when a lender offers forbearance, it is typical to include provisions designed to assist the lender in ultimately collecting on the debt. Of course, these vary depending upon the terms of the original loan, the extent of the default, the nature of the business, the duration of the problem, and the reason for the default. However, some common provisions include:
• A requirement that the debtor company affirm the amount of outstanding debt and the default
• A waiver of defenses to repayment of the loan
• Requirements that the debtor take certain actions to improve cash flow, such as:
• Working with an outside consultant to increase profitability
• Seeking refinancing of the loan
• Listing certain property for sale, whether real estate or excess inventory
• Additional security on the loan
• A representation from the debtor that it does not intend to file for bankruptcy protection
Talk to a Business Lawyer about Commercial Loan Forbearance
When a company faces a short-term cash flow problem or a crisis arises, the ability to negotiate with creditors may mean the difference between a rough period and closing the doors for good. Our experienced business lawyers can help you build the strongest case possible for forbearance and then negotiate on your behalf to increase your likelihood of success.
Mortgage Forbearance Agreement
A mortgage forbearance agreement is an agreement made between a mortgage lender and delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will, over a certain time period, bring the borrower current on his or her payments.
When Borrowers Have Trouble Paying
A mortgage forbearance agreement is made when a borrower has a difficult time meeting his or her payments. With the agreement, the lender agrees to reduce or even suspend mortgage payments for a certain period of time and agrees not to initiate a foreclosure during the forbearance period. The borrower must resume the full payment at the end of the period, plus pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. The terms of the agreement will vary among lenders and situations. A mortgage forbearance agreement is not a long-term solution for delinquent borrowers; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems. Borrowers with more fundamental financial problems such as having chosen an adjustable-rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable must usually seek remedies other than a forbearance agreement. A forbearance agreement may allow a borrower to avoid foreclosure until his or her financial situation gets better. In some cases, the lender may be able to extend the forbearance period if the borrower’s hardship is not resolved by the end of the forbearance period to accommodate the situation.
Mortgage Forbearance Agreements vs. Loan Modifications
While a mortgage forbearance agreement provides short-term relief for borrowers, a loan modification agreement is a permanent solution to unaffordable monthly payments. With a loan modification, the lender can work with the borrower to do a few things (such as reduce the interest rate, convert from a variable interest rate to a fixed interest rate or extend the length of the loan term) to reduce the borrower’s monthly payments. In order to be eligible for a loan modification, the borrower must show that he or she cannot make the current mortgage payments because of financial hardship, demonstrate that he or she can afford the new payment amount by completing a trial period and provide all required documentation to the lender. The documentation the lender requires could include a financial statement, proof of income, tax returns, bank statements, and a hardship statement.
Forbearance Agreement Fraud
A forbearance agreement, simply put, is an agreement between the lender and borrower to skip payments for a period of time due to temporary difficult circumstances on the part of the borrower. A forbearance agreement usually results in foreclosure delay and gives the borrower a chance to get back on stable ground. After the forbearance agreement period expires, the loan will revert to its original terms. In most cases, the lender still expects to have the borrower repay the full amount borrowed. If you are unable to meet your obligations because of unexpected and temporary financial difficulties, arranging a mortgage forbearance agreement with the help of an attorney could be one option to save your home.
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