David A. Lutz Attorney : Forbearance Agreements—Six Provisions That Safeguard Lenders

When a borrower defaults and asks for additional time to address the problem, lenders often consider a forbearance arrangement rather than proceeding directly to foreclosure. Forbearance can be an effective and mutually beneficial workout option—provided the agreement is drafted with precision. A sound document maintains the lender’s leverage while offering the borrower a defined chance to cure the default. The following provisions are essential to any well-crafted forbearance agreement.

What Forbearance Means

A forbearance agreement does not remove the default or change the underlying loan terms. The borrower remains in default; the lender merely agrees to postpone exercising its remedies for a limited time while the borrower completes specific tasks. This is important because a waiver would eliminate the default entirely, requiring a new one before enforcement could begin. Under forbearance, failure to meet the required conditions allows the lender to proceed immediately with its remedies.

Six Critical Clauses for a Strong Forbearance Agreement

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

The borrower must formally acknowledge the default, specify each default, confirm the outstanding balance, and recognize the lender’s right to accelerate and foreclose. The borrower should also waive any defenses, setoffs, or counterclaims. This protects the lender from later assertions that no default existed or that the lender’s willingness to forbear somehow negates it. Agreements typically clarify that, without the forbearance, the lender could accelerate at once.

2. Precise Borrower Obligations with Firm Deadlines

The agreement must outline exact tasks the borrower must complete, each tied to specific dates. Examples include scheduled monthly payments of a stated amount, providing financial statements within a set number of days after month-end, or listing collateral for sale at a defined minimum price by a specific date. Vague terms like “improve cash flow” lack enforceability. Each obligation should be objective and measurable so the lender can clearly determine whether the borrower complied. Missing any requirement should immediately end the forbearance period.

3. Events That Automatically End Forbearance

Forbearance should terminate automatically, without need for additional notice, if the borrower fails to make required payments, incurs a new default under the loan documents, makes a material misrepresentation, files for bankruptcy, becomes the subject of creditor actions, or has liens filed against collateral. Once termination occurs, the lender may enforce all available remedies. The borrower’s window to cure is the forbearance period itself; no further grace period should apply.

4. A Specific End Date

The agreement must include a clear expiration date—often 120 to 180 days from execution—unless terminated earlier under the agreement’s provisions. The lender may later choose to extend the period, but the forbearance should never begin without a firm end date. Avoid language tying the duration to uncertain future events, such as the sale of property, as this leaves the lender without control over timing.

5. Maintenance and Strengthening of the Lender’s Position

All existing collateral rights remain in effect during the forbearance period. When possible, the borrower should provide additional collateral or guarantees, supply monthly financial statements rather than quarterly reports, furnish updated collateral valuations or appraisals, and cooperate fully with any refinancing or sale process. The lender retains inspection rights for collateral and business operations. All fees, costs, and attorney’s fees are added to the loan balance and secured by the collateral, without requiring that such fees be reasonable. Forbearance should enhance—not diminish—the lender’s protections and may provide an opportunity to secure collateral or guarantees that were not part of the original loan.

6. Confirmation That the Loan Is Not Modified

The agreement must state that it does not waive defaults, change loan terms, obligate the lender to continue forbearing beyond the stated period, reduce the interest rate, extend the maturity date, or restrict any remedies. Borrowers may later argue that forbearance implies an ongoing duty to negotiate or signals relaxed enforcement. Clear language prevents these claims. Changes to interest or maturity are modifications that typically require formal approval and may impact accounting treatment, so they should not be included in a forbearance agreement.

When Forbearance Is Appropriate

Forbearance is suitable when the borrower has a realistic plan to cure, when collateral value still exceeds the debt, when the issue is temporary rather than fundamental, and when forbearance is more cost-effective than foreclosure. It should not be used when the borrower is insolvent without a viable path to recovery, when collateral is insufficient, when assets are being diverted or mismanaged, or when delay will harm the lender’s position.

Conclusion

The lender holds the stronger position: the borrower is in default, and foreclosure is an available remedy. Forbearance is a voluntary concession, not something the lender must offer. Avoid unclear terms, indefinite timelines, or limitations on enforcement rights. A well-prepared forbearance agreement outlines a clear set of obligations for the borrower and preserves the lender’s ability to act immediately if the borrower does not meet those requirements.

DISCLAIMER: This material is for informational purposes only and is not legal advice. It provides general information that may not apply to your specific circumstances. Reading this article or contacting the author does not create an attorney-client relationship. Consult qualified legal counsel regarding your situation.

About the Author: David A. Lutz owns Lutz Law Firm in Minneapolis and represents 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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