Forbearance: Overview, definition, and example
What is forbearance?
Forbearance refers to the act of voluntarily refraining from exercising a right, such as not enforcing a legal claim or delaying the enforcement of an obligation. In the context of contracts or financial agreements, forbearance often refers to a lender's decision not to immediately enforce a debt or loan repayment, even though the borrower may be in default. This delay or waiver of enforcement gives the borrower time to meet their obligations without facing legal consequences right away.
For example, if a borrower is unable to make a payment on time, the lender may agree to forbearance by temporarily suspending the payment deadline to allow the borrower time to recover financially.
Why is forbearance important?
Forbearance is important because it can provide temporary relief for individuals or businesses facing financial difficulties. It can prevent more serious consequences, such as foreclosure or legal action, by offering a grace period or a temporary reduction in obligations. For businesses, forbearance clauses can help maintain relationships with creditors and prevent the immediate need for drastic measures.
However, forbearance is not permanent—it's usually a temporary measure, and the underlying obligations will need to be fulfilled eventually. It also helps to preserve the overall financial health of the borrower while maintaining the legal rights of the lender.
Understanding forbearance through an example
Imagine a small business that is struggling to make its loan payments due to an unexpected cash flow issue. The lender agrees to a six-month forbearance period, allowing the business to delay payments and avoid penalties. After six months, the borrower is expected to resume payments as originally agreed upon.
In another example, a homeowner facing financial hardship may request forbearance from their mortgage lender. The lender agrees to forbear for three months, meaning no mortgage payments are due during that period. Afterward, the homeowner will be required to catch up on the missed payments.
An example of a forbearance clause
Here’s how a forbearance clause might look in a contract:
“The Lender agrees to forbear from enforcing the payment obligations of the Borrower for a period of [insert time period], during which time the Borrower shall not be considered in default. After the forbearance period, the Borrower will be required to resume full payment according to the original terms of the Agreement.”
Conclusion
Forbearance is a helpful tool for providing temporary relief in situations where a party is unable to fulfill their obligations on time. It allows businesses or individuals time to recover and meet their responsibilities without facing immediate legal action. By including a forbearance clause in contracts, parties can protect their interests and maintain flexibility in times of financial difficulty. However, it’s important to note that forbearance is a temporary solution and should not be viewed as a permanent waiver of obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.