The lender can take advantage of the loan forfeiture following a default on payment. It is a clause that can be applied to different types of loans. It allows legal action to be taken against the debtor to force him to pay the principal and interest on a loan. Overview on this subject.
Principle of loan forfeiture
The forfeiture clause appears in many loan contracts. It allows the creditor to initiate proceedings against his debtor in the event of non-payment of a loan. It must be clearly stipulated in the contract for the benefit of the lender. The loan forfeiture can affect all loans like mortgages and that for consumption.
Article L312-39 of the Consumer Code provides for this forfeiture in consumer law. This action pronounced in favor of the creditor constitutes the 1 st step before resorting to other means of execution. It has the effect of requiring immediate reimbursement of all outstanding payments. In addition to the capital, the debtor must pay the remaining interest due as well as the penalties.
The legislation requires compliance with the substantive and formal conditions for the forfeiture of the term. The latter should intervene after a default of payment, not of a single monthly payment, but several. Usually, the sanction is announced via a second letter of formal notice. The two letters are sent after acknowledgment of the unpaid.
What says the law
The law indicates that the pronouncement of forfeiture of term is an option offered to the creditor. This means that this clause is in no way an obligation. Its automatic application in the event of non-payment does not comply with the law. The creditor must express his will to activate the loan forfeiture stipulated in a clause of a contract.
The debtor is then ordered to pay all the sums due to his lender. By virtue of article 1343-5, the judge may, however, grant him settlement periods. This flexibility arises after an assessment of his situation. The decision to defer or to stagger the settlement also takes into account the needs of the creditor.
The lender may ask to include a forfeiture clause in this period. In other words, the debtor must pay the full amount immediately in the event of default. This gives the lender the right to compel the debtor to make full payment. When the procedure does not lead to any result, the creditor can initiate other means such as seizure. For this, he must have an enforceable title.
Case of a nullity of a forfeiture of a loan contract
Before being able to pronounce a forfeiture, the judges require the creditors to send a formal notice to the borrowers. There will be an exception in the event that the contract specifies an automatic termination. The lender cannot therefore validly pronounce this sanction without having sent this letter to its debtor. The duration to respect for this is 15 days. Information will be sent by registered letter with acknowledgment of receipt.
Failure to comply with this procedure may result in the nullity of the loan forfeiture. The creditor must be able to prove the presence of a formal notice. Otherwise, it cannot order the debtor to reimburse the outstanding payments due. The repayment must then continue to be executed according to the conditions provided for in the loan contract.
It is also necessary to ensure that there is no irregularity in the forfeiture of the right to interest. If this happens, the wrongly paid interest and fees must be deducted from the total amount of outstanding payments. As a result, there is almost nothing left of the amount due.