When a loan goes into default, it may feel as if a lender’s options are limited —accelerate, liquidate, and collect. However, a lender has various workout tools at its disposal to stave off liquidation and allow a borrower to bring the loan back into compliance and standard servicing.

A workout agreement can be beneficial to a lender and borrower. For a borrower, modifying the original loan terms for a specified period of time can provide a needed reprieve to solve a borrower’s financial hardship or otherwise cure an event of default.

Conversely, a workout agreement can be an opportunity for a lender; however, prior to negotiating a workout agreement, a lender should conduct a post-default loan review of the loan. This review allows a lender to determine if there are any deficiencies that must be remediated in order to bring its loan files into compliance with the credit approval and loan requirements. If the post-default loan review reveals any errors, such as a failure to properly perfect a security interest, it is best to resolve the deficiencies before commencing collection actions. Since remedying certain deficiencies require the cooperation of a borrower, it can be advantageous for a lender to reach an amicable workout agreement with the borrower which allows the loan deficiencies to be resolved while providing the borrower with additional time to cure the defaults.

Even when a loan file contains no deficiencies, there may be advantages for a lender to pursue a workout agreement in lieu of collection and liquidation. Specifically, in exchange for providing a borrower with additional time to cure the defaults, a lender can obtain documents that will streamline a future liquidation process should the workout ultimately not be successful.

Generally, when a lender and borrower enter into a loan workout, a forbearance agreement will be the most typically utilized type of agreement and serves as the principal document in the workout. The forbearance agreement can be used to modify the payment terms, re-amortize the debt, alter deadlines to deliver financial statements and information, change the rate of interest, and/or extend a maturity date. In short, the forbearance agreement is the road map, outlining what terms and conditions will be modified for a specified period of time, while a lender refrains (forbears) from exercising its collection and liquidation rights and remedies.
In addition, there are ancillary documents that can be used to supplement a forbearance agreement. Typically, these ancillary documents will be held in escrow with the lender. Should the borrower (or guarantors) default under the terms of the forbearance agreement, the lender can execute its rights and remedies under the ancillary documents.

If the loan is collateralized by personal property, such as business assets or certificated vehicles, a borrower can execute a voluntary relinquishment agreement. With a voluntary relinquishment agreement, a lender can streamline the repossession process by avoiding the need to commence litigation seeking an order for replevin altogether. Simply, a lender is able to repossess the collateral without obtaining a court order for replevin.

Likewise, in certain jurisdictions, a borrower can execute a deed in lieu of foreclosure related to real property collateral. Similar to a voluntary relinquishment agreement, a deed in lieu of foreclosure allows a lender to avoid the foreclosure process and gain title to the real property by filing the deed with the proper recording office. The deed in lieu of foreclosure operates similarly as other deeds transferring ownership in real property. However, by recording a deed in lieu of foreclosure, any junior liens continue to encumber the real property. Therefore, if junior liens encumber the property, the filing of a deed in lieu would not be in the lender’s best interest. In those circumstances, the lender will likely need to pursue foreclosure of its mortgage or deed of trust.

Lastly, a confession of judgment, or stipulation for judgment, can be a very valuable document in a workout. Some jurisdictions allow a borrower and/or guarantor to stipulate to the entry of judgment against them, and in favor of the lender, without commencing a formal litigation action. There is no court hearing, no opportunity for the borrower and/or guarantors to file an answer to a complaint, or otherwise dispute the debt or default. By operation of the document, a party consents to having the judgment entered when the lender files the confession/stipulation with the appropriate court. In most jurisdictions, it can easily take several months before a court enters a judgment in favor of the lender. With a confession/stipulation, a lender may obtain a judgment in a matter of days or weeks. Likewise, in a typical collection lawsuit, a lender may spend thousands of dollars in litigation fees, but with a confession/stipulation, the litigation fees are considerably reduced. There is no doubt that a confession/stipulation is a powerful tool as a lender can save significant time and expense that is typically associated with obtaining a judgment against a borrower and/or guarantor.

While it is disheartening when a loan goes into default, the lender and borrower may have options to revive the defaulted loan and avoid collection and liquidation proceedings, all while putting a lender in a stronger collection position should the workout ultimately fail.