By: Donna Faye Shetley, Partner at Johnson Smith Hibbard & Wildman Law Firm, LLP
Forbearance Agreements may provide temporary payment relief to assist debtors and creditors dealing with COVID-19 disaster. These arrangements are temporary, in contrast to the permanent solution offered by a loan modification, and may be appropriate when the parties expect the financial situation to improve in the near future. The creditor and debtor may agree to pause payments entirely during this time, or they may agree on a reduced payment. The forbearance agreement will require starting at a later date for the debtor to make full payments as provided under the original terms of the loan once the forbearance period ends. They also will likely require extra payment amounts or add payments to the end of the term to account for the payments missed during the forbearance period. Each forbearance agreement is specific to the situation. If your creditor is accommodating, it may also extend the period of the forbearance agreement if your financial situation does not improve by the time that you expected. Below describes the anatomy of such an agreement.
Before granting forbearance, there may be due diligence conducted on the financial standings of the debtor, any guarantor and a collateral check to ensure that all collateral is still in place to secure the loan.
First, the forbearance will contain the information stating that the loan in question is or will soon be in payment default. It will also include information that the creditor will retain its rights to claim judgement against the debtor if the loan is not repaid in accordance with the loan terms after the forbearance period passes.
Next, it will state that the forbearance is only in effect if the debtor agrees to, and honors all of, the conditions in the forbearance agreement.
The third part of the agreement will specify the conditions of the loan in relation to existing or new collateral or existing or new guaranties.
The final section of the agreement will give a release of liability to the creditor 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 creditor from any “backlash” from the debtor.
Please feel free to contact me to discuss in the event forbearance may be needed in today’s COVID-19 environment. Donna Faye Shetley at 864-580-2303 or firstname.lastname@example.org.
It is important to note that many strategies for forbearance have the potential of creating tax consequences and, therefore, both the debtor and creditor should consult with their tax advisers.