Did you just get a letter saying your lender is accelerating your note? The short answer is yes, it can. A lender can accelerate a loan as long as the business loan agreement gives it that right. Acceleration occurs when a lender declares a loan to be immediately due and payable. When a lender accelerates a loan, it forces a borrower to pay the entire outstanding balance of the loan at that moment, not just the payments the borrower missed. For an owner already short on cash, that is a frightening letter. But acceleration follows a set of steps and documents, and knowing them tells you where you stand. Here’s what you need to know.
Default Notice
Usually the process starts with a default notice. This is the first document the lender will send you if you got into trouble. It is the formal notice that you have breached the loan documents, and they will usually send it even if you were on good terms with them. They send it because otherwise you could claim they waived the default by not acting. It lists all the things you defaulted on, what is still owed, and where in the loan documents the problems happened. It states the remedies the lender can exercise if you stay in default, for example charging default interest, accelerating the loan, starting foreclosure - even if they never use them. And it contains a reservation of all rights clause. Also, if the loan agreement includes a personal guaranty, the business is not the only party liable for the debt. The notice may also make a demand for payment on the guarantor.
Pay close attention to what kind of default notice you received. A letter giving a borrower notice of default either
- (a) tells the borrower that the cure periods have run and an event of default has occurred, which means the lender can do whatever the loan documents say; or
- (b) tells the borrower that a cure period has begun.
If it’s a cure period, the letter has to tell how long the cure period will last, demand that the borrower cure the default within the cure period, and say what happens if the borrower doesn’t fix things during the cure period. If you are still inside a cure period, that is your window.
The Notice of Acceleration
Then comes the notice of acceleration. An “acceleration notice” is just that - it says the lender is using the clause in the loan agreement that turns the rest of the loan due immediately. Some lenders merge this into the original notice of default, and will skip sending it separately. If the loan is already mature, you can’t accelerate it, so the lender doesn’t bother sending one. The letter will explicitly state that the lender has accelerated the loan, and the section of the loan agreement that gives it that right. It will also list the amounts due (typically including principal, interest, late fees, and unpaid expenses), and state that the borrower must pay the whole loan in full within a set time, for example 10 days of the date of the notice or the lender reserves the right to start taking actions.
Why does a lender bother? If foreclosure is on the table, your lender will probably “accelerate” the loan (declare the whole balance due, not just the missing monthly payments) before starting a foreclosure. Acceleration allows the lender to demand the entire amount of the loan, even the portion that would not have been due until later. But note that even acceleration may not guarantee that you will have to pay the entire amount of the loan. In some states, such as California, you can cure a missed payment rather than repay the whole amount, even after acceleration. So accelerating your loan after you’ve missed payments is really a way to put even more pressure on you, and your lender may be just trying to raise the stakes. It’s not always in a lender’s best interest to do that, especially if it’s hoping to do a workout with you; some lenders wait to accelerate until they see how those talks are going.
If your lender decides to accelerate the debt, it will mean business from there. It should stop billing you for regular monthly payments, though you may still try to send money in. If you decide to take a stab at it, then you should expect a new letter saying your partial payment won’t reset your payment schedule or undo the acceleration. It could even terminate any agreement it has with you to put the payments on hold. It may also stop talking to you about debt settlement.
Forbearance Agreements
If talks do go ahead, expect paperwork first. Before talking about restructuring the loan, the lender will have you sign a pre-negotiation agreement. The idea is that any discussions afterward will be treated as settlement talks, which are confidential and can’t be used in court (Rule 408 of the Federal Rules of Evidence). In practice, the document lets the lender encourage compromise without fear that anything said at the table will be used against it if the talks fail. Nothing said in those discussions is supposed to waive any rights either. Neither side is obligated to enter into talks. Nothing is binding until you actually reach and sign a written agreement. Either party may walk out at any time for any reason, which is mostly to protect the lender in case you’re just stalling. The borrower shouldn’t rely on a deal and should try to pursue other alternatives. The lender can go ahead and do anything it’s entitled to at any time, even while discussions are ongoing.
The other document you may see is a forbearance agreement. It says the lender will not do certain things for a limited period, provided the borrower (and possibly the guarantor) agrees to certain conditions, such as continuing to make payments and not falling into any new default. It pauses the lender’s deadlines for pursuing remedies but does not, by itself, extend the borrower’s deadlines for curing defaults. The loan documents stay in full force except for what the agreement specifically changes. A Forbearance Agreement is commonly negotiated along with a modification. Don’t confuse forbearance with a permanent change to the terms of the loan (which would be a modification); a forbearance is meant to be temporary.
Forbearance agreements benefit lenders as well as borrowers. If the lender declares a default but doesn’t go after it right away, and later does, the borrower can argue that the lender “waived” its right to act by waiting, or even that waiting changed the terms of the loan agreement. You might say that the lender lost its right to enforce the loan because it waited too long. A forbearance agreement guards against those arguments. For this reason, forbearance agreements often include statements that say
- that the borrower and its guarantors acknowledge there has been an Event of Default, and that the lender has provided all required notices;
- that the lender made no promises not in the loan documents, and that the borrower remains bound by them; and
- that the borrower and its guarantors represent and warrant that they have no “offsets or defenses” and waive any right to contest the default.
Many also ask you to release the lender from all known and unknown claims, and a lender may put similar terms in a pre-negotiation agreement. Borrowers should know what they are signing.
So yes, your lender can accelerate, and the letters that lead up to it matter. Read the default notice and acceleration notice carefully, because you’ll find important deadlines and conditions in there. Don’t ignore the notice. Small, partial payments won’t undo acceleration. A forbearance agreement can give you some time, but it will come with conditions, and it will often require you to give up your claims against the lender. Get help reviewing the documents before you sign anything.
