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If the current economic downturn continues, the number of borrowers that default under debt agreements will increase significantly. A previously prized borrower that once could dictate terms to its lender likely will find itself with fewer options when facing a default and will be forced to work with its existing lender to obtain either a waiver or a forbearance agreement.
Waiver and forbearance agreements contain many similar provisions, and they both provide a certain amount of relief for the borrower. One significant legal difference: A forbearance agreement will not eliminate the default. To the contrary, a forbearance agreement expressly preserves the default, and the lender only agrees to refrain from exercising its remedies during the forbearance period. A waiver agreement, on the other hand, waives the default and restores the parties to their pre-default positions.
Advising clients facing a default requires an understanding of the following: the different legal issues parties should consider in determining if a waiver or a forbearance agreement is appropriate, actions a lender should consider to bolster its position on a post-default basis, and provisions parties may consider in drafting and negotiating a waiver or a forbearance agreement.
This article outlines steps to be considered when advising a client facing a default. Article excerpted from Texas Lawyer. For the complete article click here.