Forbearance Agreements: What You Are Really Signing When You Buy Time

A forbearance agreement is a contract in which a lender agrees not to exercise its default remedies for a defined period, in exchange for concessions from the borrower. It does not waive the default, forgive the debt, or fix the loan. It buys time, and time is purchased with admissions, collateral, fees, and releases. Signed with clear eyes, a forbearance agreement is one of the most useful tools in a distressed borrower’s kit. Signed casually, it can be the document that decides the endgame before the borrower realizes the endgame has started.

I negotiate these agreements regularly on both the borrower and lender side at AEGIS Law, and the same handful of provisions decides most of the value in every one of them. This article walks through what you are actually agreeing to, and where the negotiating room really is.

What does a forbearance agreement actually say?

The core exchange is simple. The lender promises to stand still until a stated date, provided the borrower complies with the agreement. The borrower, in turn, acknowledges the debt down to the penny, admits the defaults exist and are not curable except as stated, reaffirms the loan documents, and usually releases the lender from any claims through the date of signing.

Around that core, the agreement typically adds milestones the borrower must hit, such as delivering a refinancing commitment by a certain date or listing real estate for sale. It adds enhanced reporting, often weekly cash flow variance reports. It frequently adds collateral: liens on previously unencumbered assets, pledges of equity, new or reaffirmed guarantees. And it adds economics: a forbearance fee, default rate interest or something near it, and reimbursement of the lender’s professionals.

Read the conditions precedent and the definition of the forbearance period with particular care. Lenders often condition the standstill on deliverables at signing, executed guarantees, deposit account control agreements, updated appraisals at the borrower’s cost, and the period frequently ends on the earliest of several triggers rather than on the stated date alone. A 120-day forbearance that terminates automatically upon any new default of any kind is shorter than it looks, because in a distressed company small technical defaults are a near certainty. Negotiating materiality thresholds and cure periods into the termination triggers adds real durability to the deal.

Why do the admissions and the release matter so much?

Because they convert a negotiation into an execution. Before the forbearance agreement, a lender pursuing remedies must prove its debt, its defaults, and its compliance with the loan documents, and it must weigh whatever counterclaims the borrower might raise. After a well-drafted forbearance agreement, all of that is stipulated. If the deal breaks, the lender’s path to judgment or foreclosure is dramatically shorter, and the borrower has contractually disarmed itself.

That is not a reason to refuse the deal. It is the price of the deal, and lenders will not transact without it. It is a reason to make sure the time you are buying is worth what you are paying, and to negotiate the pieces that remain negotiable: the length of the period, the achievability of the milestones, the scope of the release, the treatment of the fee if you perform, and what happens at the end if you have substantially complied but need thirty more days.

How long should a forbearance period be?

As long as the plan genuinely requires, plus a cushion, and not a day less than you can defend with the forecast. The most common borrower mistake in my experience is accepting a 90-day period for a plan that realistically needs six months, on the theory that the lender will surely extend. Extensions do happen, and they happen on the lender’s terms, with a fresh fee, fresh conditions, and fresh leverage each time.

Milestones deserve the same discipline. Every milestone is a tripwire, and a missed milestone typically terminates the forbearance automatically. Tie milestones to events you control or can reliably predict. A milestone that depends on a third party, such as a buyer’s diligence schedule or a city’s permit office, should carry explicit grace mechanics. This is drafting work, and it is exactly where counsel earns the fee.

What should you have in place before you sign?

Three things. First, a forecast that shows you surviving the forbearance period with room to spare, because running out of cash mid-period converts your negotiated standstill into a controlled demolition. Second, a plan B that you have actually scoped: a refinancing process already in motion, a sale process ready to launch, or a bankruptcy strategy prepared well enough that filing is a decision rather than a scramble. The existence of a real plan B changes how the lender negotiates plan A.

Third, an understanding of your personal exposure. If guarantees are being granted or reaffirmed, if trust fund taxes are unpaid, or if recent transfers to insiders could be challenged later, those facts should shape the strategy now. A forbearance agreement negotiated without regard to the guarantee picture can protect the company for six months while quietly worsening the owner’s position for years. The company and its owners are different clients with different risks, and good restructuring advice accounts for both.

Finally, think about the exit before the entrance. The best forbearance agreements state not just the standstill but the path: if the refinancing commitment arrives by the milestone date, the lender will cooperate with payoff mechanics and lien releases on a defined schedule; if the sale process produces a qualifying offer, the lender will consent on stated terms. Writing the success scenario into the document prevents the dispiriting pattern where a borrower performs for six months and then discovers the goalposts have wheels.

Frequently asked questions

Is a forbearance agreement the same as a loan modification?

No. A modification permanently changes loan terms, such as rate or maturity. A forbearance leaves the loan and its defaults in place and simply suspends enforcement for a period. Many restructurings use both: forbearance first, modification once the plan proves out.

Can a lender terminate forbearance early?

Yes, if a termination event occurs, and the list of termination events is drafted by the lender. New defaults, missed milestones, inaccurate reporting, and material adverse changes are standard. Narrowing and clarifying that list is a core negotiating objective.

Does signing a forbearance agreement prevent me from filing bankruptcy?

Provisions waiving the right to file are generally unenforceable as against public policy. But related provisions, such as pre-agreed relief from the automatic stay, can be given weight. This is a question to resolve with counsel before signing, not after.

Talk with Eric

Before you sign a forbearance agreement, understand exactly what you are buying and exactly what you are paying. I review and negotiate these agreements as Chair of the Bankruptcy and Restructuring Practice Group at AEGIS Law. Reach me at elangston@aegislaw.com.

By Eric Langston, Chair, Bankruptcy & Restructuring Practice Group, AEGIS Law

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship with AEGIS Law.