After a default occurs the Bank will need to determine whether the deed of trust promissory note and/or loan agreement provides that the occurrence of one or more events results in automatic acceleration of the debt. This will provide that upon the occurrence of one of these events the entire obligation becomes due and payable at the Bank’s option without notice to the debtor. The operative loan documents may require the Bank to give the debtor notice that it is accelerating the loan and/or give the debtor a “grace period” of anywhere between three (3) and 60 days to cure the default.
NOTE: The Bank should never allow a grace period on a garnishment or bankruptcy default.
The Bank should remember that many courts have determined that every lending relationship has an underlying requirement of good faith and fair dealing. Before the Bank accelerates the loan because of a default it should think about:
•The effect on the debtor’s business. How does this loan fit into its balance sheet. Is it the only credit the borrower has?
•The history of the relationship between the Bank and the debtor. Will it come as a surprise to the debtor if the loan is called? Have signals been sent to management that indicate a long-term relationship in the future?