Default

Question 1

Defintion of Default

Answer 1

Default - debtor’s failure to pay the debt when due or otherwise perform as agreed between the parties.

Question 2

When is Payment Due?

1. Installment Loans
2. Singl Payment Loans
3. Loans Payable on Demand
4. Lines of Credit

Answer 2

1. Installment Loans - parties contemplate that the debtor will repay in a series of payments.
   
   1. Usually due at regular intervals and amounts.
2. Single Payment Loans – loans made payable on a specific date.
3. Loans Payable on Demand - the debtor will pay the loan whenever the bank demands the money. (The making of such a demand is referred to as “calling” the loan.)
4. Lines of Credit - The bank contracts to lend up to a fixed amount of money (the line “limit”) as the debtor needs it.
   
   1. Lines of credit are typically immediately payable when the creditor makes the demand on the used credit amount.

Question 3

Acceleration

1. Default Rule -
2. Effect of Acceleration Clause
3. Waiver

Answer 3

1. Default Rule - Absent a contract provision to the contrary, the common law treats installments as separate obligations.
   
   1. Debtor is in default only with regard to the missed payments and Creditor is entitled to sue only for those missed payments.
2. Acceleration Clause – most contracts opt out of the common law rule by stating that, in the event of default by the debtor in any obligation under the repayment contract, the creditor may, at its option, declare all of the payments immediately due and payable.
   
   1. most states require notice of intent to accelerate even if K doesn’t require it.
3. Waiver - Accelleration Clause may be waived either expressly or implicitly (e.g., accepting late payments = waiver of acceleration on said payments)

Question 4

Debtor’s Right to Cure

1. General Rule
2. UCC Right to Redeem Collateral

Answer 4

1. General Rule - debtor has the right to cure a default by paying the overdue amount before the creditor accelerates (whoever accelerates or cures first wins)
   
   1. _​_statutory redemption may allow curing afer default.
2. UCC Right to Redeem Collateral - debtor or any other secured party may redeem the collateral by (1) fullfilling all obligations secured by the collateral and (2) payment of reasonable expenses and attorneys fees.
   
   1. Redemption allowed any time before the secured party disposes of the property or accepts the collateral in full or partial satisfaction of the obligation

Question 5

Effect of Creditor’s Repossession Without Disposition of Collateral on Bankruptcy

Answer 5

1. Repossession Without Disposition of Collateral – if a secured creditor doesn’t dispose of repossessed property before debtor files for bankruptcy, the debtor’s right to redemption and cure becomes part of the bankruptcy estate.
   
   1. Turnover to Bankruptcy Estate - Any entity that possesses property that the bankruptcy trustee may use, sell, or lease under the Bankruptcy Code is required to turn over or account for the property. Id. §542(a).
   2. Adequate Protection - Before requiring a party to turn over property, however, courts must ensure that the party’s interest in the property is adequately protected. Id. §§362(d)(1), 363(e).

Question 6

Effect of Bankruptcy on Default and Acceleration

Answer 6

1. Automatic Stay - Once a debtor files for bankruptcy, the Bankruptcy Code automatically stays any act by parties to exercise control over, or to enforce a pre-petition or post-petition lien against, property of the bankruptcy estate. 11 U.S.C. §§362(a)(3)-(5) (2003).