When a borrower falls behind and asks for additional time to resolve the default, lenders often look to forbearance as an alternative to immediate enforcement. Forbearance can be an effective workout tool when drafted carefully. The goal is to maintain the lender’s rights while giving the borrower a defined window to remedy the problem. To achieve that balance, certain terms are essential.

Understanding Forbearance

A forbearance agreement does not forgive or modify the default. The default remains; the lender simply agrees to hold off on exercising remedies for a limited period while the borrower completes specific tasks meant to cure the issue. This is significant because a waiver would eliminate the default and require a new default before action could be taken. With forbearance, a failure to meet the stated obligations allows the lender to proceed immediately with enforcement.

Six Essential Components of a Forbearance Agreement

1. Borrower’s Admission of Default and Waiver of Claims

The agreement should require the borrower to admit the existence of the default, identify each specific default, acknowledge the outstanding loan balance, and confirm the lender’s right to accelerate and foreclose. The borrower must also waive any defenses, offsets, or counterclaims. This prevents later arguments that the default was nonexistent or improperly handled. A common provision clarifies that without the forbearance, the lender could accelerate the loan immediately.

2. Clear and Objective Borrower Obligations

All conditions the borrower must meet should be detailed, measurable, and tied to firm deadlines. Examples include: scheduled payments, timely submission of monthly financials, or listing collateral for sale at a defined price point and by a specific date. Ambiguous terms like “borrower will try to improve cash flow” are too subjective. The lender must be able to point to an exact requirement and determine whether the borrower performed. If a payment or reporting requirement is missed, the forbearance ends automatically.

3. Immediate Termination Events

A well-drafted forbearance identifies events that terminate the agreement automatically, without further notice. These usually include: failure to make required payments, any additional default under loan documents, material misrepresentations, bankruptcy filings, creditor lawsuits, or new liens on collateral. Upon termination, the lender may exercise all rights and remedies without delay. The forbearance itself serves as the borrower’s opportunity to cure—there should be no second chance.

4. A Definite End Date

The agreement must have a specific expiration date and time unless ended earlier by a termination event. Most forbearance periods fall between 120 and 180 days. Although the lender may later extend the period, it should never begin without a clear cutoff. Open-ended language such as “until the property is sold” gives the borrower indefinite time and leaves the lender without control over the timeline.

5. Protection of the Lender’s Collateral and Rights

Throughout the forbearance period, all collateral and security rights remain fully intact. If possible, the borrower should provide additional guarantees or collateral, deliver financial statements on a monthly basis, provide updated collateral valuations, and cooperate with any sale or refinancing efforts. The lender also retains inspection rights for collateral and business operations. All fees, costs, and legal expenses are added to the loan balance and secured by existing collateral—without a requirement that such fees be “reasonable.” Forbearance is an opportunity to enhance the lender’s position, not weaken it.

6. Confirmation That No Loan Terms Are Amended

The agreement must state clearly that it does not waive existing defaults, alter loan terms, obligate the lender to extend forbearance beyond the stated period, modify interest rates or maturity dates, or limit available remedies. Borrowers may attempt to argue that forbearance implies ongoing negotiation or restricts strict enforcement later. Explicit language protects against those claims. Changing interest rates or extending maturity dates would constitute loan modifications that may trigger approval requirements or affect loss reserves, so they should not appear in a forbearance agreement.

When Forbearance Is Appropriate

Forbearance is typically suitable when the borrower presents a realistic cure plan, when collateral value exceeds the loan balance, when the financial issue is short-term, and when forbearance costs less than immediate foreclosure. It should not be used if the borrower is insolvent with no chance of recovery, if collateral is insufficient, if assets are being diverted or mismanaged, or if delays will worsen the lender’s position.

Conclusion

The lender has the advantage: the borrower is in default, and enforcement is an available remedy. Forbearance is a discretionary concession, not an obligation. Avoid unclear terms, unlimited extensions, or provisions that restrict enforcement. A strong forbearance agreement gives the borrower a structured path to fix the default while allowing the lender to act promptly if those obligations are not met.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. The information is general and may not apply to your specific circumstances. No attorney-client relationship is created by reading this article or contacting the author. Consult with a qualified attorney regarding your situation.

About the Author:
David A. Lutz is the owner of Lutz Law Firm in Minneapolis, representing financial institutions, businesses, and individuals in banking law, secured transactions, and commercial litigation. He can be reached at david@lutzlawfirm.com or 612-424-2110.

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