Drafting a Forbearance Agreement

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Forbearance agreements are an essential part of any loan agreement between borrowers and lenders. They provide a framework for managing a loan payment default and outline the terms and conditions to ensure both parties reach an amicable resolution over the issue, avoiding costly litigation. With a well-crafted forbearance agreement, borrowers and lenders can come to an arrangement that is beneficial to both parties.

At Genie AI, we understand how important these agreements are in resolving such matters. That’s why we developed our open source legal template library - it uses millions of datapoints to teach our AI what a market-standard forbearance agreement looks like, allowing anyone to draft and customize high quality legal documents without paying for a lawyer or needing Genie AI account. We also offer step-by-step guidance on how to access our library today so you can get started straight away.

When entering into a forbearance agreement, it is vital that all terms and conditions are carefully considered from the start. This includes determining the repayment schedule, the amount of temporary relief provided during this time as well as outlining any potential consequences of noncompliance such as additional fees or collection efforts by either party involved in order for the agreement to be fair and balanced for everyone involved.

At Genie AI we believe that drafting an effective forbearance agreement is key in helping borrowers and lenders reach an amicable solution rather than enduring costly litigation - so read on below for our step-by-step guidance on how you can access our free template library today!

Definitions (feel free to skip)

Forbearance Agreement: A legal document between a lender and borrower that allows the borrower to temporarily suspend or reduce their debt payments.

Loan Principal: The original amount of a loan.

Interest Rate: A percentage of the loan amount that the borrower must pay to the lender.

Payment Schedule: An agreed-upon timeline for when the borrower must make payments on the loan.

Collateral: An asset given to the lender that can be used to cover the loan if the borrower fails to make payments.

Tax Implications: Possible financial effects of a transaction, such as a loan agreement, when filing taxes.

Legal Risks: Possible negative outcomes that could arise from a legal agreement.

Default Repayment Plan: A repayment plan to be used if the borrower fails to make payments on the loan.

Contents

• Overview of Forbearance Agreement
• Terminology and Definitions
• Considerations Before Drafting a Forbearance Agreement
• Assessing Financial Health of Both Parties
• Identifying Potential Tax Implications
• Assessing Legal Risks
• Negotiating the Terms of the Forbearance Agreement
• Defining the Amount of Forbearance
• Establishing a Reasonable Payment Schedule
• Establishing a Deadline for Repayment
• Structuring the Payment Plan
• Determining the Frequency of Payments
• Determining the Method of Payment
• Securing Collateral for the Forbearance Agreement
• Establishing a Monitoring Process
• Setting up a System for Tracking Payments
• Setting up a System for Documenting Progress
• Identifying Contingency Plans
• Establishing a Default Repayment Plan
• Creating a Plan to Renegotiate Terms
• Verifying Compliance
• Drafting a Compliance Checklist
• Establishing a Timeline for Compliance Checks
• Drafting the Final Agreement
• Defining the Obligations of Both Parties
• Defining the Consequences of Non-Compliance
• Filing the Agreement with the Appropriate Agencies

Get started

Overview of Forbearance Agreement

• Understand what a Forbearance Agreement is and why it is used
• Learn the general components of a Forbearance Agreement
• Identify the relevant parties in the agreement
• Understand the purpose of the Forbearance Agreement
• Determine the terms and conditions that should be included in the agreement

You have completed this step when you have a general understanding of the purpose of a Forbearance Agreement and its components.

Terminology and Definitions

• Understand what a forbearance agreement is and what it does
• Research the different types of forbearance agreements available
• Familiarize yourself with the terms and conditions of the forbearance agreement
• Identify the relevant parties involved in the agreement, such as the borrower and lender, and state their roles and responsibilities
• Compile a list of all terms and conditions of the agreement, such as repayment, interest rates, and other conditions
• Draft the agreement, being sure to include all relevant terms and conditions

When you have completed all the steps listed above, you can move on to the next step!

Considerations Before Drafting a Forbearance Agreement

• Understand the underlying loan agreement, including all terms and conditions
• Consider any applicable state and federal laws that may govern the agreement
• Determine the purpose of the forbearance agreement
• Analyze the financial situation of both parties and the feasibility of the agreement
• Estimate the length of time the loan will be in forbearance

Once you have a clear understanding of the underlying loan agreement, applicable laws that may govern the agreement, the purpose of the forbearance agreement, the financial situation of both parties, and the length of time the loan will be in forbearance, you can check this off your list and move on to the next step.

Assessing Financial Health of Both Parties

• Request financial statements from both parties, including balance sheets, income statements, and cash flow statements
• Calculate and compare net worth of both parties, as well as their current financial health
• Consider additional factors such as any other existing debt, income, and assets
• When finished, you should understand the overall financial position of both parties and be able to evaluate the feasibility of a forbearance agreement
• Once you have requested, received, and evaluated the financial statements of both parties, you can move on to the next step of identifying potential tax implications

Identifying Potential Tax Implications

• Research the tax consequences of the proposed forbearance agreement
• Understand any potential tax liabilities on both sides of the agreement
• Consider any tax deductions that may be available due to the agreement
• Consult a tax professional, if necessary
• Make sure the agreement is structured in a manner that mitigates potential tax liabilities
• Record any tax implications as part of the agreement

Once you have identified any potential tax implications of the proposed agreement, you can check this off your list and move on to the next step of assessing legal risks.

Assessing Legal Risks

• Consult with counsel to determine any potential legal risks associated with the forbearance agreement
• Review the governing documents of the borrower and lender to ensure compliance with laws and regulations
• Analyze the borrower’s ability to pay and the potential impact of any agreements on the borrower’s financial standing
• Assess any potential conflicts of interest between the parties to the forbearance agreement
• Review any existing contracts that could be affected by or conflict with the forbearance agreement
• Identify any potential risks of fraud or misrepresentation associated with the terms of the forbearance agreement

Once you have consulted with counsel, reviewed the governing documents, analyzed the borrower’s ability to pay, assessed potential conflicts of interest, reviewed existing contracts, and identified any potential risks of fraud or misrepresentation, you can check this step off your list and move on to negotiating the terms of the forbearance agreement.

Negotiating the Terms of the Forbearance Agreement

• Discuss the specific terms of the forbearance agreement with the other party, including details such as the length of the forbearance period and any fees associated with the agreement
• Make sure both parties are in agreement on the terms before writing up a draft of the forbearance agreement
• When both parties have agreed on the terms, you can move on to the next step of defining the amount of forbearance.

Defining the Amount of Forbearance

• Determine how much of the loan needs to be put into forbearance.
• Calculate the total amount of the loan at the time the forbearance agreement is drafted.
• Consider the borrower’s ability to pay and decide on an appropriate amount of forbearance.
• Make sure the amount of forbearance is reasonable and in line with industry standards and regulations.
• Record the amount of forbearance in the agreement.

How you’ll know when you can check this off your list and move on to the next step:
• You will know that this step has been completed when you have negotiated and agreed on an amount of forbearance and have recorded it in the agreement.

Establishing a Reasonable Payment Schedule

• Calculate the remaining balance owed on the loan
• Determine the total amount that needs to be paid to resolve the loan
• Calculate an acceptable monthly payment plan that will cover the remaining balance owed
• Negotiate with the lender to come up with an agreeable payment plan
• Establish a payment due date and payment amount
• Include any additional fees or interest that may be associated with the forbearance agreement

Once you have established a reasonable payment plan and agreed to the terms with the lender, you can check this step off your list and move on to the next step, Establishing a Deadline for Repayment.

Establishing a Deadline for Repayment

• Set a deadline for repayment of the debt that is reasonable and achievable for both parties to adhere to
• The deadline should allow the borrower enough time to make their payments without forfeiting their other financial obligations
• Consider the borrower’s current financial situation and set a timeline accordingly
• Create a document that outlines the agreed-upon deadline and have it signed by both parties
• Once both parties have signed the document and the deadline has been established, you can move on to structuring the payment plan.

Structuring the Payment Plan

• Decide if you want to structure the payment plan as a single lump sum payment or in installments
• Determine the total amount of the payment plan
• Specify how much will be paid in each installment
• Agree on the date of each payment
• Consider whether to include a late fee or penalty for missed payments
• When you are satisfied with the payment plan, include it in the Forbearance Agreement
• Once the payment plan has been agreed upon and included in the Forbearance Agreement, you can check this off your list and move on to the next step.

Determining the Frequency of Payments

• Establish whether the payment plan will require one lump sum payment or multiple payments
• Calculate the frequency of payments, taking into account the debtor’s ability to make payments on time
• Consider the total amount to be paid and determine the length of the forbearance agreement required
• Advise the debtor of the frequency of payments and discuss any changes or flexibility if required
• Incorporate the agreed upon payment frequency into the forbearance agreement

When this step is complete, you will have established the payment frequency and determined the length of the forbearance agreement.

Determining the Method of Payment

• Determine if the payment will be made in one lump sum or in installments - for example, a fixed amount each month
• Consider the borrower’s financial situation and determine a payment method that works for both parties
• Take into account any other obligations the borrower may have - for example, other loans or bills
• Consider the feasibility of automatic payments, if applicable
• Make sure to document the method of payment in the forbearance agreement

You will know you have completed this step when you have documented the agreed-upon method of payment in the forbearance agreement.

Securing Collateral for the Forbearance Agreement

• Identify the collateral that will be used to secure the Forbearance Agreement.
• Determine the value of the collateral, and ensure it is sufficient to cover the total debt.
• Draft documents that grant the lender a security interest in the collateral.
• Have the documents signed by both parties.

You can check this step off your list and move on to the next step once all documents have been signed and the lender has been granted a security interest in the collateral.

Establishing a Monitoring Process

• Determine the frequency with which you need to monitor the borrower’s compliance with the terms of the forbearance agreement.
• Develop a process for regularly reviewing the borrower’s compliance with the forbearance agreement.
• Establish a timeline for when you will review the borrower’s progress against the forbearance agreement.
• Document the results of your monitoring process.
• Determine any necessary changes or adjustments that need to be made to the forbearance agreement based on the results of your monitoring process.

You can check this off your list and move on to the next step when you have established a timeline for when you will review the borrower’s progress against the forbearance agreement, documented the results of your monitoring process, and determined any necessary changes or adjustments that need to be made to the forbearance agreement.

Setting up a System for Tracking Payments

• Create a spreadsheet to track payments from borrower and lender
• Include columns for the date of payment, amount, and payment type
• Set up a reminder system for lender to send payments and for borrower to make payments
• Ensure that the system is compliant with applicable laws
• When you have set up the system, check it off as complete and move onto the next step.

Setting up a System for Documenting Progress

• Create a spreadsheet that will document the borrower’s financial situation, including income, expenses, debts, assets, and liabilities.
• Document the borrower’s current financial circumstances, such as job status, income sources, and any other relevant information.
• Track the borrower’s payments and any changes in the borrower’s financial situation.
• Set up a system to track the borrower’s progress, such as a timeline or a progress report.
• Document any milestones or important events that occur during the forbearance period.

You will know when you can check this off your list and move on to the next step when you have set up a comprehensive system to track the borrower’s progress, documented any milestones or important events in the forbearance period, and established a timeline or progress report.

Identifying Contingency Plans

• Establish a plan to deal with any potential default on loan payments
• Review the loan agreement to determine if any default remedies are already outlined
• Assess the underlying security to determine if any additional remedies can be put in place
• Include a clause in the forbearance agreement that outlines the remedies available if the loan is not repaid as agreed
• Include a clause that outlines the lender’s right of acceleration if the borrower defaults
• Make sure the borrower understands the consequences of defaulting on the loan before they sign the forbearance agreement
• Once all contingency plans have been identified and documented in the agreement, you can move on to the next step of establishing a default repayment plan.

Establishing a Default Repayment Plan

• Gather all relevant information about the parties involved, including their financial positions
• Establish a clear timeline for when each payment will be due
• Determine the amount of each payment and how it should be allocated
• Specify the default payment method that will be used
• Create a repayment plan that is feasible for both parties to agree to
• Document the repayment plan in a formal agreement

Once the repayment plan has been established, the parties should review the agreement to ensure that it is clear and concise and that it meets their needs. Once the agreement is finalized, both parties should sign the document to signify their acceptance of the terms. At this point, the repayment plan is officially in effect and the parties can move on to the next step in the process.

Creating a Plan to Renegotiate Terms

• Gather information on the borrower’s current financial situation
• Compare the borrower’s current financial situation to the terms of the original loan agreement
• Determine which terms need to be renegotiated and what the new terms should be
• Draft the forbearance agreement outlining the new terms and submit it to the borrower for review
• Once the borrower has reviewed and signed the agreement, the new terms become legally binding
• Check this step off your list once the forbearance agreement has been signed and submitted

Verifying Compliance

• Review the terms of the loan to ensure that the borrower has complied with all the terms of the agreement
• Make sure that the borrower has made all payments on time
• Check if there are any late fees or other charges that are owed
• Ensure that the borrower has not defaulted on any other loan obligations
• Verify that the borrower has not transferred any assets without the lender’s consent
• When you have confirmed that all of the terms of the loan have been complied with, you can move on to the next step in the process of creating a forbearance agreement.

Drafting a Compliance Checklist

• Identify the stakeholder(s) responsible for enforcing compliance with the agreement
• Identify the key points of compliance that must be adhered to
• Draft a checklist of compliance requirements that will be monitored
• Include a timeline for compliance checks
• Ensure that the checklist is clear and precise
• Include a section for feedback and corrective action
• Include a section for recording compliance check results
• Have the agreement signed by all parties involved
• Once the checklist is completed, the agreement is ready to be implemented

Establishing a Timeline for Compliance Checks

• Determine the frequency of compliance checks and deadlines for each compliance check.
• Consider whether you want any additional compliance checks to be done beyond the standard timeline.
• Decide if the compliance checks will be conducted by a third-party or in-house.
• Create a timeline for each compliance check and set a deadline for each compliance check.
• Document the timeline for compliance checks and deadlines in the agreement.
• When the timeline and deadlines for compliance checks have been established and documented, you can move on to drafting the final agreement.

Drafting the Final Agreement

• Carefully review the terms and conditions that have been agreed upon in prior steps to ensure the Forbearance Agreement accurately reflects the discussions.
• Draft the Forbearance Agreement in a clear and concise manner, making sure to include all relevant details and provisions.
• Include a signature line at the end of the document, and make sure both parties sign and date the document.
• Ensure the Forbearance Agreement is properly notarized.
• Once the document is finalized and signed by both parties, you can check this step off your list and move on to the next step.

Defining the Obligations of Both Parties

• Outline the specific terms of the forbearance agreement, including the amount of the payment, when it is due, the interest rate, and any other obligations of the parties.
• Establish any other conditions that must be met, such as a requirement to provide financial statements or reports.
• Specify any additional terms or conditions that are to be included in the agreement.
• Make sure that the language of the forbearance agreement is clear and unambiguous.

Once you have outlined the obligations of both parties, you can move on to the next step, which is defining the consequences of non-compliance.

Defining the Consequences of Non-Compliance

• Discuss and agree on the consequences that should be imposed if either party fails to comply with any of the obligations specified in the agreement.
• Consider including language that would allow either party to take legal action if the other party fails to fulfill its obligations.
• Make sure that the consequences are clearly defined and understood by both parties.
• When the consequences have been agreed upon, the step of Defining the Consequences of Non-Compliance is complete and you can move on to the next step of Filing the Agreement with the Appropriate Agencies.

Filing the Agreement with the Appropriate Agencies

• Determine the applicable agencies for filing the agreement
• Contact the applicable agencies for guidance on filing the agreement
• Prepare the documents for filing the agreement, including signing by both parties
• Submit the agreement to the applicable agencies
• Follow-up with the agencies to ensure that the agreement was received and accepted
• Once the agreement is accepted, you should receive confirmation of the filing
• Keep a copy of the agreement and confirmation of the filing for your records
• You can check this step off your list once the agreement is accepted and the confirmation of the filing is received

FAQ:

Q: How does a forbearance agreement differ between the US and EU jurisdictions?

Asked by David on 3rd June 2022.
A: A forbearance agreement is an arrangement between a debtor and a creditor that allows the debtor to delay or suspend payments temporarily. In the US, the terms of a forbearance agreement are governed by state law, so the specific terms will vary from state to state. In the EU, however, there is more of a unified approach to forbearance agreements, with uniform regulations across all member states. The main differences between US and EU laws for forbearance agreements include the ability of creditors to charge interest or fees during the period of forbearance; the duration of time before a creditor can take legal action against a debtor; and the ability to modify the terms of the original agreement.

Q: Is there a way to extend a forbearance agreement if needed?

Asked by Rebecca on 12th January 2022.
A: Yes, it is possible to extend a forbearance agreement if needed. Depending on your particular situation, you may want to consider renegotiating the terms of your original agreement with your creditor in order to extend it. Alternatively, you may be able to apply for an extension through your lender or servicer. However, it is important to note that extending your forbearance agreement may result in additional fees or interest being applied. It is also important to make sure that any new terms you agree upon are documented in writing and signed by both parties.

Q: What is the difference between a forbearance agreement and a loan modification?

Asked by Sarah on 17th April 2022.
A: A forbearance agreement is an arrangement between a debtor and creditor that allows for temporary delay or suspension of payments on an existing debt. A loan modification, on the other hand, is an alteration in one or more terms of an existing loan contract that is mutually agreed upon by both parties in order to make payments more affordable. A loan modification typically involves reducing the interest rate or monthly payment amount for the borrower, but could also involve extending the loan term or making other changes to repayment terms. Unlike a forbearance agreement, which usually only lasts for a few months, loan modifications are usually permanent and can provide long-term relief from financial hardship.

Q: What happens if I don’t abide by my forbearance agreement?

Asked by Christopher on 5th February 2022.
A: If you do not abide by your forbearance agreement, you could face serious consequences such as late fees, penalties and damage to your credit score. Additionally, your lender may be able to pursue legal action against you in order to collect what you owe them. As such, it is important that you make all payments outlined in your forbearance agreement on time in order to avoid these repercussions. If you find yourself unable to make payments due to financial hardship, it is important that you communicate this with your lender as soon as possible so that alternative arrangements can be made.

Q: Is there any way I can avoid getting into default when using a forbearance agreement?

Asked by John on 11th August 2022.
A: Yes – there are several steps you can take in order to avoid getting into default when using a forbearance agreement. Firstly, make sure that you understand all of the terms of your forbearance agreement before signing it so that you know exactly what is expected of you during this period of time. Secondly, it is important that you stay organized and keep track of all payments outlined in your agreement so that nothing slips through the cracks and goes unpaid. Finally, if at any point during your forbearance period you find yourself struggling financially and unable to keep up with payments due under the contract – make sure that you communicate this with your lender as soon as possible so alternative arrangements can be made before defaulting.

Q: What information do I need when drafting my own forbearance agreement?

Asked by Matthew on 28th October 2022.
A: When drafting your own forbearance agreement there are several pieces of information which are necessary for inclusion - including details about both parties involved such as their names, contact details and addresses; details about the debt owed such as its amount and type; information about how payments will be made such as when they will be due; details about any interest or fees which may be charged; and finally any other relevant information such as deadlines or legal requirements which must be met in order for the contract to remain valid. It is important that all of these details are included accurately within your document in order for it to be legally binding – so make sure that everything is double checked before signing off on it!

Q: Can I get out of my current forbearance agreement if I find myself facing financial hardship?

Asked by Michael on 10th December 2022.
A: Yes - depending on your situation it may be possible for you to get out of your current forbearance agreement if you find yourself facing financial hardship. The first step would be to communicate with your lender or servicer about this difficulty – they may be willing to work with you in order to modify or extend your current arrangement so that it works better for both parties involved (although this may involve additional fees or interest being applied). Alternatively, if no suitable solution can be reached then you may be able to apply for an entirely new loan which replaces this original debt obligation – although this should only be done after careful consideration and consultation with experts where possible!

Example dispute

Suing a Company for Breach of Forbearance Agreement

• A plaintiff may bring a lawsuit against a company for breach of a forbearance agreement if the company has failed to meet the terms of the agreement.
• The plaintiff must provide evidence to show that the company has not fulfilled the agreement as outlined in the contract.
• The plaintiff must also demonstrate that they have suffered some kind of harm or loss due to the company’s breach of contract.
• The court may award damages to the plaintiff, which could include compensation for any losses suffered and/or punitive damages.
• The court may also order the defendant to fulfill the terms of the agreement, such as paying back any monies owed.
• Settlement between the parties is also possible, where the defendant agrees to pay an amount of money to the plaintiff and the case is dropped.

Templates available (free to use)

Forbearance And Waiver Agreement
Forbearance Contract
Forbearance Contract Commercial Property Loan Pre Workout
Forbearance Contract Commercial Property Loan Pre Workout California
Forbearance Contract Commercial Property Loan Pre Workout Florida
Forbearance Contract Commercial Property Loan Pre Workout Illinois
Forbearance Contract Commercial Property Loan Pre Workout New York
Forbearance Contract Commercial Property Loan Pre Workout Texas

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