Forbearance Agreements can be valuable tools for lenders at the first sign of a troubled
credit. Lenders seldom immediately shut down a credit upon the initial default, and typically
provide the borrower with additional time to attempt to solve its financial problems.
Accordingly, a limited forbearance gives up little on the part of the lender, yet may provide an
opportunity for the lender to receive various benefits that may be very helpful in the event of a
subsequent meltdown of the credit or foreclosure.
BENEFITS TO BE RECEIVED BY LENDER IN A TYPICAL FORBEARANCE
Outstanding Balance. Acknowledgment by borrower of the outstanding
balance, in order to avoid or reconcile any disputed balance.
Current Defaults. Acknowledgment by borrower of specific current defaults and
right to accelerate under the loan agreements, in order to avoid future disputes or
potential defenses relating to the defaults. Practice Note: Defaults should be
waived only in rare instances in a forbearance agreement.
Request to Forbear. Acknowledgment by borrower that it has requested lender
to forbear, to establish consideration for benefits to be received by lender in the
Drop Dead Date. Establishment of a “forbearance termination date,” or “drop
dead date,” by which the borrower must resolve certain issues (i.e., overadvance,
refinancing, covenants, defaults, sale of business).
Amendment to Loan Documents. Amend loan documents (i.e., new or revised
covenants, decrease amount of loan commitment).
Conditions to Forbearance. Condition of the forbearance that borrower must
take certain actions, for example:
retain a work-out consultant, who will provide regular status reports to
retain an investment banker or broker to sell the business or a division of
the business, who will p