Loan modification

When a borrower cannot perform on the current terms, the alternatives are default, forbearance, or modification. Modification changes the deal permanently: a lower payment, a longer term, a rate change, a deferral of principal, a reduced daily remittance.

What the lender usually gets in exchange

This is the part to read, because the concession is rarely free.

• A general release. The borrower and guarantors release all claims against the lender existing to that date. Any argument about how the loan was sold, what the broker promised, whether the debits were correctly applied — gone
• An acknowledgment of the balance. The borrower confirms the amount owed and that there are no defences or offsets. This forecloses disputing the accounting later
• Reaffirmation of the guaranty, and sometimes an additional guarantor — a spouse, a second entity
• Additional collateral or a new lien
• A confession of judgment or stipulated judgment, held and entered on any further default. Common in workouts and available in fewer states than it used to be
• Fees: a modification fee, plus the lender's legal costs
• Waiver of the automatic stay or other bankruptcy provisions, whose enforceability varies

Against forbearance

Forbearance is a promise not to enforce for a period; the underlying terms are unchanged and the arrears remain. Modification changes the terms themselves. A document titled forbearance can contain every one of the concessions listed above.

In merchant cash advance

What is offered as a modification is frequently a reduction of the daily debit under the reconciliation clause, which under the contract may be a right the merchant already has. It is worth establishing whether you are being granted a concession or being sold your own contractual entitlement in exchange for a release.