Our New Jersey Collection Lawyers Discuss Forbearance Agreements
When speaking with New Jersey collection lawyers about pursuing a debt that a debtor owes you or your company, they may recommend that you enter into a forbearance agreement with the debtor. It is important to understand the basics of this type of legal agreement before consenting to this type of action.
Loan Forbearance Basics
When a debtor defaults on a loan, the lender can opt for three distinct types of collection action. They may seek to foreclose on the loan and collect any collateral that a debtor used to secure the loan. Or they may amend the loan agreement for different terms. In addition, they may agree to a forbearance agreement. Forbearance will allow the borrower to withhold payments on the loan for a specified amount of time and then resume making payments. For this type of agreement to be effectual, your New Jersey collection lawyers must feel that the borrower will rectify any financial situation they may be in within a short period of time, and that they will be able to resume making payments on the loan.
The Difference Between Forbearance and Amending a Loan
There is a very specific difference in granting forbearance and amending the terms of a loan. For example, if the maturity date of a loan comes due and the debtor has not fully repaid the loan, the lender can change the terms of the loan to extend the maturity date. By making this amendment, the lender has ensured that the loan does not enter into default and that he or she keeps the terms of the loan in place. When the lender amends the loan, the debtor must still make payments according to the terms of the original loan.
When a forbearance agreement has been issued, the parties temporarily put the terms of the loan on hold. By entering into a forbearance agreement, the borrower states that they have defaulted on the terms of the loan. However, through this agreement, they agree to resume the payments on the loan after the forbearance period. In return, the lender acknowledges the default but refrains from pursuing collections during the forbearance period.
In many cases, the lender will attach certain conditions to the loan and the borrower for allowing the forbearance. These may include continued interest accrual during the forbearance period, repayments at a higher interest rate when the loan resumes, or additional security for the loan. If the borrower does not resume payments on the loan at the specified date, the lender will be able to sue for breach of contract and collect the debt on the loan under the terms of the original loan agreement.
Before Granting Forbearance
Before granting forbearance, there will be a complete investigation of the financial standings of the borrower. In addition to checking finances and credit ratings, the lender should conduct a search for liens, tax liens, or other judgments against the borrower to gain a complete view of their finances. In addition, a survey will be conducted to ensure that all collateral is still in place to secure the loan. The forbearance agreement will contain many legal stipulations.
Loan Is in Default
First, it must contain the information stating that the loan in question is in default and that the borrower admits to this default. It must also include information that the lender is in full rights to claim a summary judgement against the borrower if the loan is not repaid. This gives the lender the right to collect on the debt if the forbearance is not honored.
Legal Conditions of the Forbearance
The next thing that you must include in this document is legal conditions of the forbearance. This will state that this contract is only in effect if the borrower agrees to, and honors all of, the conditions in the forbearance agreement. This section will also include information that states what will happen if the parties do not honor the forbearance agreement. In most cases, it will state that the loan will enter into default. Moreover, it will state that full collections on the loan will begin immediately.
Conditions of the Loan in Relation to Security
The third part of the agreement will specify any conditions of the loan in relation to security. If the loan was previously secured by property or goods, or if the forbearance requires a security deposit, the terms will be defined. The borrower must agree to all the terms and provide the necessary security before finalizing the agreement. All parties should carefully review this part of the agreement.
Release of Liability
The final section of the agreement will give a release of liability to the lender from all other parties. This release will cover any loss or damages caused by the forbearance agreement, loan documentations, or any other actions taken during the process. This section protects the lender from any “backlash” from the borrower.
What Are the Benefits of Forbearance?
Forbearance has many benefits for both the borrower and the lender. Lenders get an admission of default from the borrower. This admission will stand in court as a reason to collect the debt with aggression. The borrower, if granted forbearance, gets a second chance to pay off their debt without much damage to their credit history. Forbearance is not for everybody or applies in every situation. There must be a willingness and ability for the borrower to repay the debt at a later time for this type of legal action to work. If the debtor does not foresee the ability to repay in the future, or negates the deal, the creditor has their admission of default and can aggressively collect the debt.
Call New Jersey Collection Lawyers Today to Learn More About Your Forbearance Agreement
If you have found that your business or lending institution cannot collect on a debt, you need to speak to a collections attorney today. Snellings Law, LLC has dedicated members of their practice that specialize in the collection process. You can reach Snellings Law, LLC today at 973.265.6100. We can schedule an appointment to review your collection needs. You do not have to lose out when someone defaults on a loan. You just need to take legal action to force payment. To solve these problems, call New Jersey collection lawyers today.