Monday, August 15, 2011

How is a Promissory Note Different from a Forbearance Agreement?

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.