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Forbearance Agreements: A Useful Tool for Lenders After Default
With a borrower in default and facing the threat of imminent litigation or bankruptcy, both lenders and borrower are increasingly looking to the appealing alternative of forbearance agreements. These are arrangements whereby lenders refrain from exercising their available default remedies in exchange for certain concessions from the borrower. Depending on the circumstances, forbearance agreements give lenders an alternative to the expenses and delays associated with litigation or bankruptcy. Forbearance agreements can also be used to take the place of a more long-term modification of the parties' arrangement. Accordingly, a forbearance usually gives up little on the part of the lender, but allows the lender to secure a number of benefits that will be very helpful in the event of a subsequent default by the borrower.
Parties consider forbearance agreements for a variety of reasons. Lenders seldom immediately shut down a transaction after an initial default and typically give the borrower time to solve its financial problems. If the default is minor or is only temporary, a forbearance agreement may be entered into to give the borrower time to cure the default. In situations where the borrower and the lender are negotiating a broader restructuring, the parties may agree to enter into a forbearance agreement to give the lender time to analyze the default situation and determine if it is willing to consider a longer arrangement, as well as give the parties time to negotiate the terms of a possible restructuring and ultimately document the new arrangement. A lender may also consider a forbearance in situations where the borrower may be refinancing its debt or selling the company or its assets. Under these circumstances, a lender may agree to a forbearance simply to allow the 90-day preference period to expire with respect to any new collateral. Finally, lenders can use a forbearance agreement to correct certain deficiencies in the loan documents or with lender's interest in the collateral.
The reason for entering into a forbearance agreement obviously de-pends on the specific transaction. The forbearance agreement can also take on many forms, such as a letter agreement, additional loan documents, or the preparation of a formal 'Forbearance Agreement.' However, here are a few issues to consider when agreeing to a forbearance and eventually preparing a forbearance agreement.
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