COVID-19 & Forbearance Agreements

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.

“Send lawyers, guns and money, they’d get me out of this…”

The first cassette I ever owned was Michael Jackson’s ‘Thriller’, purchased in 1982. Ten years later, my mom bought the soundtrack to the movie “The Body Guard”, which featured Whitney Houston’s rendition of “I will always love you”. ‘Thriller’ has now sold over 65 million copies and ‘The Body Guard’ has sold over 40 million, making these two albums the number one and number four best selling albums of all time, respectively. Between the two of them, Whitney Houston and Michael Jackson sold well over 250 million records during their lifetimes.

Unfortunately, selling millions of albums is not the only thing Whitney and Michael had in common. Both stars died over the last three years, both had well-documented battles with substance abuse (that may have lead to their deaths), and both were deeply in debt when they died. Whitney Houston borrowed tens of millions of dollars against the sales of records she had not yet made and Michael Jackson owed millions to a long line of creditors, including promoters, banks, and the second son of the king of Bahrain, among others.

Substance abuse and personal debt issues come up regularly in the estate planning process. Where appropriate, many parents condition receipt of trust funds on the passing of drug tests or attending counseling. A properly drafted trust may also protect your assets from the creditors of one of your beneficiaries. If you have relatives who struggle with debt or substance abuse issues, you may want to consider a trust as part of your estate plan.

If you have personal loans, documenting them properly may save your family attorney fees. The federal and state estate tax returns include schedules of the assets and liabilities of the decedent. These schedules are essentially a snapshot of everything a person owned (and owed) when he or she died. Tracking the debts of a decedent is often one of the more challenging parts of compiling the estate tax schedules, because many personal debts are informally documented, if they are documented at all. If you have personal loans, you should discuss these loans with your estate planning attorney, as properly drafted loan documents, combined with accurate amortization schedules, can save your attorney time (and therefore save your family money) during the administration of your estate.

One more note – there are provisions of the tax code which penalize parties for loans made at below market interest rates. If you have a substantial loan – whether personal or business – you may want to discuss the loan terms with your attorney.

The estates of Michael Jackson and Whitney Houston have benefited from increased record sales following the stars’ deaths. A large part of the estate income from these sales will be going to the satisfaction of personal debts. Most estates do not have this sort of income to offset debts and the debts are instead paid from the residue of the estate. For this reason, debts (including your home mortgage) should be considered when planning the distribution of your assets under a will or trust.

Most families will (hopefully) never have to deal with the sort of  substance abuse and debt problems that followed Michael Jackson and Whitney Houston through the later years of their lives. When the issues do arise, however, properly drafted documents may be the family’s best protection agaist creditors and predators who are looking to get access to the assets of the estate. The key, as always, is to communicate the specifics of your situation to an attorney who specializes in estate and business planning.