As with other debt liabilities, a default on a student loan will result in a drastic decline in a borrower`s credit quality, which may take years to recover from. Unlike other loans, student loan defaults remain for life, even in the event of a bankruptcy filing. In addition, borrowers who are insolvent cannot receive additional federal assistance for students, or apply for credit deferral or leniency, which may help distressed debtors. With respect to federal student loans, the first consequence of default is that the acceleration occurs, which means that the entire credit balance is immediately due. If this balance is not profitable, the government can withhold tax refunds or all federal benefits that the borrower receives. Collection companies can also sue borrowers for the right to confiscate their salaries – and after such a procedure, debtors are often charged the collector`s court fees. This default event is almost always displayed in a loan agreement in any form. Depending on how it was designed, a delay event is triggered when an insolvency situation (regardless of the definition of the loan contract) has arisen for the borrower. Sometimes the threat of insolvency proceedings against the borrower may be enough to trigger this default event. Therefore, this provision can be negotiated quite strongly, since the borrower wishes to limit as much as possible the importance of an insolvency event, while the lender will likely have the opportunity to trigger a default event and demand immediate repayment of the loan, the borrower being at the first indication that the borrower is in financial difficulty. However, from the borrower`s perspective, the uncertainty of an essential amending provision can be problematic and, although it is rarely used by the lender to proclaim a late payment event, there are instances where such provisions have been used to freeze facilities.
At least it can give the lender leverage (z.B to impose difficult activity or higher prices) in negotiations with a borrower who is in a difficult situation. In general, a borrower should ensure that any essential provision on adverse changes (i) is not due to a deterioration in the status of individual companies, but only to a deterioration in the state of the group as a whole, and (ii) is limited to something that significantly affects the borrower`s ability to meet its payment obligations under the loan agreement. For example, you can`t control the market value of your home. If your loan requires an annual valuation and falling below a certain percentage is a default on your credit/value ratio, you may be late due to events beyond your control. A failure event with a cross default is triggered when the borrower is late in another agreement, either with the lender or with a separate third party. The borrower should therefore carefully assess the other agreements it has entered into and the likelihood of default. If so, the borrower may attempt to insert a closed language that excludes certain agreements from registration by this provision. For example, it is customary to see a minimum value compared to a default value under another agreement. Borrowers should also ensure that the wording of this late event does not impede or impede the effectiveness of business activities.