Use A Forbearance Agreement To Negotiate With Your Creditors And Stay Out Of Bankruptcy
Anyone in business will tell you that bumps come up in the road. Temporary dips in sales, problems collecting accounts receivable, even adding expense to manage a potentially profitable new line of business may all contribute to creating a cash flow crisis. Similarly, an individual may be faced with job loss, an unexpected medical condition or separation/divorce creating an income interruption in the home. Sometimes debtors can address these issues by making arrangements directly with creditors and therefore avoid the more drastic remedy of a bankruptcy case. One such typical arrangement is a forbearance agreement.
What is a forbearance agreement?
Forbearance agreements generally come up when you have a loan with a bank or other creditor, you’ve defaulted on the loan, and the creditor has either begun (or threatened to begin) enforcement action against you or your business. At that point, you may ask the creditor to stop the foreclosure sale, or in a business case, to stop suing you or liquidating its collateral. As part of this arrangement you may need to:
- Begin (or resume) making payments to the creditor
- Offer the bank additional collateral to help secure the creditor’s position
- Agree to liquidate certain assets in order to pay down principal on the loan
- Agree to shorten the original maturity date of the loan
Each of these concessions will help the creditor reduce its risk of loss in the credit situation. In exchange for doing these kind of things, the creditor will agree to not move forward with, or forbear from, conducting its foreclosure sale, obtaining its judgment or otherwise exercising its “rights and remedies.”
What are additional terms to a forbearance agreement?
Creditors usually have some additional terms that they’re going to require as part of that forbearance. They’re usually going to require:
- A release, so if you have claims against the creditor you’re going to let those go
- Waiver of a jury trial, so that if you want to ever sue the creditor in connection with that forbearance agreement you’re only going to be able to have the trial before a judge
- Acknowledgment of the amount that is due on the loan, so that you’re not going to be able to come back and challenge the outstanding principal, interest and other charges that may have accrued
- Waiver of any defenses or counterclaims. This way later, especially if you’re involved in a commercial situation, you won’t be able to contend that the creditor, especially if it’s a bank, interfered with your ability to develop a piece of property, or to move forward in a certain way in your business.
These are valuable rights that borrowers generally lose when they agree to a forbearance agreement.
Should you enter into a forbearance agreement?
Forbearance agreements are very valuable the vast majority of the time for businesses and for individuals, because they give you a chance to get back on your feet without filing for bankruptcy. These are usually arrangements that work best when all that’s needed is a temporary fix for a temporary problem.
Sometimes a forbearance is joined to a loan modification agreement when there is a permanent change to the terms of a loan. This may occur if the creditor is willing to maintain the relationship on a longer term basis. The creditor will usually only see value in changing the loan terms if it believes that repayment is more likely in a modification than in a lawsuit or a liquidation of its collateral.
How do you get the creditor to agree to a forbearance agreement?
Many clients want to know what the creditor is willing to take in a default situation. However, creditors don’t like to negotiate against themselves. More importantly, a creditor doesn’t know what the client can afford to pay. That’s why negotiations for a forbearance agreement will usually begin by the debtor making a proposal, frequently written. That proposal will generally be accompanied by financial information regarding the debtor, its income and operations.
When negotiating a forbearance agreement debtors need to furnish the creditor with accurate financial information and the proposal needs to be something a debtor can reasonably satisfy. It’s vital to resist the urge to make promises you won’t be able to keep. Every creditor wants to recover as much of their debt as possible, but nobody wants to put in the time, effort and money to negotiate and draft a forbearance agreement that will put the parties right back where they started.