Forbearance Agreements
A forbearance agreement is a contract between a borrower and a lender where the lender agrees to not exercise certain rights that it has under an existing agreement in exchange for actions on the part of the borrower. An example would be a bank's promise not to foreclose for a certain amount of time although they have the right to in exchange for the borrower's promise not to claim certain defenses if the account continues its delinquency and requires a lawsuit.
A forbearance agreement is useful in a situation where the borrower has defaulted due to a temporary circumstance like temporary unemployment or health problems. The goal of the forbearance plan is to bring the borrower current in the loan, or to give them time to secure a loan or to sell the collateral for more than they may get at a foreclosure sale. Depending on the needs of the lender and borrower, the terms of the plan will differ. Some may require additional payment on top of the monthly payments to bring the borrower current while others may lower the monthly payments or even defer payments, giving the borrower the opportunity to recover financially. The type and severity of the default that triggered the forbearance agreement are taken into account, as are past defaults.
Why would a borrower willingly promise not to bring up certain defenses if a lawsuit is brought? The forbearance agreement offers the borrower time that they may need to avoid the lawsuit altogether. The alternative to signing the forbearance agreement would be the borrower exercising their contractual rights against the defaulting borrower, possibly including an immediate lawsuit. Lawsuits are expensive and it is usually in the best interest of both parties to come to other agreements if possible. If the borrower believes that they have a good defense as to why they should not have to repay the borrower, it may be in their best interests to allow the lawsuit to commence rather than waiving the defense and not being able to raise it when the lawsuit begins following default of the forbearance terms.
Because both parties are giving up certain rights, it is important for both parties to carefully read the forbearance agreement and seek the opinion of independent counsel.