With new times come new terms. Six months ago we had never heard of Coronavirus or social distancing. Now, we hear those terms so often we look forward to the day we never hear them again. Another term we’re starting hear in the wake of the Coronavirus outbreak is forbearance. Prior to COVID-19, most of us probably didn’t know what forbearance meant. Unfortunately, the financial impact of COVID-19 will likely cause many businesses and individuals to seek forbearance agreements with their creditors.
Forbearance means the action of refraining from exercising a legal right, especially enforcing the payment of a debt. A forbearance agreement is an agreement between a lender and a borrower (or a creditor and a debtor) to temporarily suspend the payments owed by the borrower to the lender. Forbearance agreements are often entered into in lieu of the lender filing a lawsuit to foreclose a mortgage or trust deed.
Borrowers, or debtors, adversely affected by the Coronavirus outbreak may need to enter into forbearance agreements with their creditors if unable to make their payments when due. Pursuant to the CARES Act, persons who have a federally backed mortgage can seek forbearance of their mortgage payments for up to nearly a year (they can initially apply for 180 days and then seek a 180 day extension). Many mortgages are federally backed. Interested persons should contact their loan servicer to determine if their mortgage is federally backed. Even if a mortgage isn’t federally backed, given the widespread financial impact of the outbreak, there is a fair chance the lender has some forbearance or other options available.
Technically, a forbearance agreement is not a loan modification. Forbearance generally means that the lender agrees to forebear from taking action to enforce the borrower’s failure to make a payment when due and triggering the default clause under the agreement for payment failure. Persons facing the inability to pay their debts as a result of the outbreak need to consider promptly seeking forbearance or a modification of the payment terms of the loan or debt. Whether the parties enter into a true forbearance agreement or a loan modification, there are a number of considerations and competing interests.
While it is incumbent on the debtor to seek forbearance or a loan modification if the outbreak is or will likely cause them to not be able to make payments when due, a forbearance agreement can actually benefit both parties. For the borrower, one of the primary benefits of a forbearance agreement is that it gives them some breathing room with regard to their cash flow, cash on hand and long term ability to pay their debts. A forbearance agreement gives the debtor some time to figure out their next steps.
From the debtor’s perspective, it is important to recognize that a forbearance agreement can actually also benefit the lender. While the lender would obviously prefer to receive payment in a timely manner, a forbearance agreement can add certainty to the lender and improve the likelihood and level of repayment of the debt. It also allows the lender to avoid having to enforce the remedies under their contract, such as foreclosure. Enforcement of contract remedies can be expensive and time consuming. Furthermore, some remedies, such as evictions and foreclosures, have been prohibited by the government during the COVID-19 outbreak.
Some things to keep in mind with regard to forbearance agreements.
Forbearance Period: A forbearance agreement should include language with regard to how long the lender agrees to forebear the debt without taking action to enforce the terms of the agreement (e.g., accelerate the debt for failure to pay in a timely manner) and how much additional time, if any, the debtor might get to repay the debt. In most cases, the balance owed by the debtor continues to accrue interest while the debtor is not making payments pursuant to a forbearance agreement. The forbearance period may be for a specified time period or tied to the occurrence of a specified event (e.g., the governor of Oregon lifting the moratorium prohibiting on-premises consumption of food and drink and gatherings of more than 25 people).
Conditions: The lender will likely require the borrower (and, if applicable, personal guarantors) to meet specific conditions before the forbearance agreement becomes effective. Such conditions might include: providing financial statements; additional reporting requirements; an updated business plan; efforts to seek financial assistance or loans through available government and related programs; and the payment of a forbearance fee and the costs incurred by the lender while negotiating the forbearance agreement.
Acknowledgments and Reaffirmations: The lender will likely require the borrower, in consideration of the forbearance, to make acknowledgements regarding the validity and amount of the underlying debt. The reaffirmations usually also include language that the lender is not waiving the right to exercise their remedies under the contract in the event of future defaults by the borrower. Guarantors are generally also required to re-affirm their guaranties.
COVID-19 has adversely impacted the ability of many persons to pay their debts when due. Adversely impacted debtors should promptly inform their lender if they are encountering financial difficulties. Creditors understand that the outbreak has had a huge financial impact on many businesses and individuals. It is generally in the interest of the creditor to work with their debtors. Negotiated solutions between the parties, memorialized by a forbearance agreement or loan modification, are usually better than engaging in litigation, particularly given the current prohibitions and the fact that the courts are not operating at full capacity and won’t be for some time.
If you need any assistance with regard to a forbearance agreement or modification of a loan, whether you are a creditor or a debtor, please reach out to our team. We’re here to help you during the Coronavirus pandemic.
Van M. White III has more than 20 years of experience as a lawyer in Oregon and Washington. Van has been a partner at Samuels Yoelin Kantor since 2001 and has served on the firm’s management committee since 2010.