Ask the legal expert ... about loan forbearance

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Attorney John Durso, Ungaretti & Harris LLP
Attorney John Durso, Ungaretti & Harris LLP

We are in default under our loan documents. Will we be able to obtain a forbearance agreement from our lender?

A forbearance agreement is between a borrower and a lender when the lender agrees to refrain from exercising any legal remedies available under the loan documents following one or more defaults. Entering into a forbearance agreement allows time for workout negotiations between the borrower and the lender to occur and for a workout plan to be implemented.

It is at the lender's discretion whether to agree to a forbearance agreement, but a short-term forbearance may be possible to allow the borrower and the lender some “breathing room” to assess problems with the business of the borrower and potential solutions. So long as the borrower has sufficient cash to continue to operate its business, it may be in the best interests of the lender to allow time to seek a resolution to difficulties rather than take quick action and risk recovering less than the outstanding amount.

A forbearance agreement is not a waiver of any existing defaults and will be for a limited time period. The agreement will ask the borrower to confirm and specifically identify all existing defaults. Any defaults not identified or other defaults that arise during the forbearance period would not be subject to the forbearance agreement, so the borrower must exercise care in identifying all current and possible future defaults that would be covered by the agreement. 

The agreement may include new restrictions on the borrower in addition to the covenants in the existing loan documents. A borrower should retain experienced legal counsel to negotiate the terms of the forbearance agreement and give it the best chance of executing a  turnaround plan.

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