What is an intercreditor agreement
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Intercreditor agreements have several functions, such as discussing liabilities and rights of the parties involved in the agreement. For instance, if one lending party has an economic interest in the borrower’s boat, while another lending party wants to sell the boat to pay the borrower’s loan owed, the lending party who has first right to the boat will receive the money before the other. The intercreditor agreement details who has the first right to the borrower’s property in case of bankruptcy. These agreements also supply information about lien arrangements, security interests and real estate.
Depending on the amount of debt owed to the lenders, the intercreditor agreement will use certain language to determine which lending party receives certain property or assets. When a debt is very large, an intercreditor agreement will specify that each lending party’s attorneys will determine who receives the money or assets of the borrower.
It is not mandatory for lenders to give notice to the borrower that his debt is being sold. Lenders may notify borrowers after the debt is sold as well as other arrangements that have been made concerning the sales of the debt. A borrower has the right to challenge any changes or sales of debt the lenders made, as well as any changes
to the lending contract itself. However, the lender may retaliate by refusing to give more credit to the borrower or even demand that payment be made in full immediately to the lender.
Second Lending Party
The intercreditor agreement should require the second lending party to agree to not impede on the first lending party’s right to be paid in full from the borrower first. While the first lending party is working on receiving payment from the borrower, the second lending party will be silent for 180 days. This gives the first lending party a chance to collect from the borrower without interruption. On the other hand, it is also important that the second lending party still protect her interest in the lien. This means the second lending party will want assurance that the first lending party will not take all the money from the borrower and leave nothing for the second lending party. If a new agreement is reached between the first lending party and the borrower, the second party will have interest in the new lien, still second in interest from the first lending party.
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