Why default is a dirty word

When you own a small business and get into financial difficulty it is often tempting to just ignore the problems that mount up.  One of the things that small business owners often overlook is that failure to make payments as and when due, constitutes a default.  Although not universally true, it is usually the case that a default in performance of one loan is, in fact, a default in many other loans to different creditors.  Default can give your creditors, even ones that you are current with, an excuse to accelerate debt, demand satisfaction, even reposes or seize collateral, all because you defaulted on one credit facility.

The important thing to remember is that while creditor representatives are always your good buddy when things are going well, when things are bad, they do whatever the law allows them to do to protect the lender’s interests.  In fact, it is often a violation of their duties to shareholders and government regulators if they fail to act to protect the lender’s interests.  In other words, they just don’t have the authority to be nice guys.

A timely bankruptcy filing can prevent a default.  It freezes financial affairs and under the anti-discrimination provisions of the Bankruptcy Code, the act of Bankruptcy itself is not a default.  This is true no matter how many times the contract documents say that filing bankruptcy creates a default.

Since most creditor’s rights change pre-default to post-default, preventing a default can be an important step in reorganizing the affairs of any small business.

This article is written by an attorney at Wyatt & Mirabella, PC. Always consult an attorney before making any legal decisions. To make an appointment today for a free consultation, please click here to contact us.