When a borrower is unable to meet the loan repayments, the bank can initiate debt collection proceedings. Forfeiture of the loan is one of the most severe penalties it can impose. Its legal definition is that of a contractual sanction that puts an end to the payment schedule and requires immediate repayment of the entire outstanding capital. While this measure is formidable, it is not inevitable. The law, and above all recent case law, have considerably strengthened the rights of borrowers by subjecting the validity of acceleration clauses to strict scrutiny.
1. What is a forfeiture of term and what are its consequences?
An acceleration of payment is a contractual sanction whereby a creditor, usually a bank or financial institution, deprives the debtor of the benefit of the payment terms granted. In practical terms, in the case of a mortgage or consumer loan, this means that the payment schedule and amortisation table are cancelled. The borrower loses the right to repay the loan in successive monthly instalments and is obliged to immediately repay the capital in full.
This sanction, provided for in a specific clause in the loan contract, is mainly applied in the event of non-payment of instalments. The consequences for the defaulting borrower are immediate and severe. The lender may demand, in a single payment :
- The total outstanding capital ;
- Interest due and not yet paid ;
- A penalty indemnity, often provided for in the contract, generally set at a rate of 7% or 8% of the outstanding capital.
For example, if a borrower still owes €100,000 capital on a property loan and stops making the monthly payments, the bank, after declaring that the loan has been accelerated, may demand immediate payment of the €100,000, plus late payment interest at the contractually agreed rate and any penalties. This situation often leads to litigation and seizure proceedings, in particular the seizure of the property being financed. To better anticipate and understand all the consequences of defaultour complete guide will help you.
2. Cancellation proceedings: the key role of formal notice
A bank cannot cancel a mortgage arbitrarily or automatically. Case law has consistently set out a framework for this procedure, requiring the lender to comply with specific steps designed to protect the borrower and enable him or her to resolve the situation.
The requirement for prior formal notice without effect
Before the lender can declare that the loan has been accelerated, it must send the borrower a formal notice to pay. This formal act, usually sent by registered letter with acknowledgement of receipt, must precede the sanction. As the Cour de cassation (French Supreme Court) has ruled, the acceleration of payment "may not, unless expressly and unequivocally stipulated, be declared acquired by the creditor without the delivery of a formal notice which has remained without effect". (Cass. 1st Civil Chamber, 3 June 2015, no. 14-15.655, Bull. civ. I, no. 131).
This formal notice must clearly inform the debtor of the nature and amount of the sums claimed (the unpaid instalments). Above all, it must give the borrower a period in which to rectify the situation, specifying the deadline for payment. Only if the borrower fails to pay by the deadline will the bank be entitled to declare that the term of the loan has expired and make the debt immediately due and payable.
What is a 'reasonable notice period'?
Case law has recently strengthened this protection by adding an essential condition: the notice period must be "reasonable". In a major ruling on 22 March 2023, the Cour de cassation held that a clause providing for automatic termination of the loan contract without reasonable notice created a "sudden worsening of repayment conditions" and constituted a significant imbalance to the detriment of the consumer (Cass. 1re civ., 22 March 2023, no. 21-16.044).
Although the law does not stipulate a specific period, this decision has put an end to the practice of many credit institutions of granting unreasonably short periods, often as short as 8 days. A period of notice is considered reasonable if it effectively allows the borrower, within a few days, to take the necessary steps to remedy his default. A notice period that is too short is now considered to be the sign of an unfair clause, liable to be annulled by a judge, which can derail the entire recovery procedure and open up a phase of litigation.
3. The forfeiture of term clause and control of unfair terms
The main area in which forfeiture of the term of a contract can be challenged is in consumer law and its protection against unfair terms. A term is deemed unfair if it creates a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer. Both European and French case law have gradually strengthened this control, offering borrowers powerful means of defence.
Significant imbalance': criterion for an unfair term
Significant imbalance is the central criterion for classifying a term as unfair. It is assessed at the time the contract is entered into, taking into account all of its provisions. An acceleration clause may create such an imbalance if the conditions under which it is implemented are particularly harsh for the borrower, with no real quid pro quo.
The Court of Cassation's ruling of 22 March 2023, which is currently in the news, is a perfect illustration of this concept. In ruling that unreasonable notice before expiry of the term led to a "sudden worsening of repayment conditions", the Court directly linked the lack of notice to the fact that the clause created a significant imbalance. The clause was therefore found to be unfair and termination of the contract was ruled out. For an in-depth analysis of what constitutes a unfairness of the clauseOur complete guide is at your disposal.
The judge's power to raise the question of unfairness on his own initiative
A fundamental protection, often overlooked, lies in the judge's power and even obligation to review the unfairness of loan contract terms on his or her own initiative. This means that even if the borrower or his lawyer does not explicitly request it, the judge must examine the contract to check that the consumer's rights are respected. This obligation, imposed by the Court of Justice of the European Union (CJEU, 21 Nov. 2002, Cofidis, C-473/00), applies to all stages of the procedure.
In an even more protective manner, this power extends to the enforcement judge, i.e. the magistrate responsible for supervising seizure measures following a conviction. This means that even after a final judgment ordering a borrower to pay, the enforcement judge can still examine the loan agreement and rule out the application of an unfair clause, such as one providing for an irregular acceleration of payment, thereby preventing the bank's debt from falling due. To find out more about role of the enforcement judgewe have prepared a dedicated article.
Penalty: clause deemed unwritten
When a clause is found to be unfair, the penalty is radical: it is "deemed unwritten". This means that the judge does not modify or adapt it; he simply cancels it, as if it had never existed in the document. The loan contract continues to apply, but without the clause. Consequently, if the acceleration clause is deemed unwritten, the bank loses the right to invoke this sanction. The contract must then resume its normal course, in particular the amortisation schedule initially provided for, and the bank can no longer demand immediate repayment of the capital. It can only claim payment of the monthly instalments outstanding at the date of the judgment.
4. Lender liability: a defence for the borrower
Forfeiture of the loan is often seen as the sole consequence of the borrower's default. However, as a credit professional, the bank is subject to strict obligations, failure to comply with which may constitute a fault and render the acceleration procedure ineffective - an essential point in the event of a dispute.
The duty to warn and check solvency
Before granting credit, the lender must ensure that the borrower is creditworthy. This obligation includes consulting the Fichier national des Incidents de remboursement des Crédits aux Particuliers (FICP) (National Register of Consumer Credit Repayment Incidents) kept by the Banque de France. In addition, case law has established that the bank has a duty to warn. The bank must warn the uninformed borrower of the risks of excessive debt that the loan could generate in relation to his or her financial capacity, taking into account other charges such as borrower's insurance or a guarantor. If the bank fails in this duty and the risk of indebtedness materialises, it may be held liable, which could lead to the borrower being compensated for his debt.
The obligation to verify the legality and performance of the main contract (earmarked credit)
In the case of earmarked credit, i.e. a loan taken out to finance a specific transaction (purchase of a car, installation of solar panels by a company, etc.), the lender's obligations are even more extensive. The Court of Cassation has ruled that the lender is at fault if it releases the funds to the seller without first ensuring that the main contract is in order and has been fully performed.
For example, if the purchase order is irregular or if the service has not been fully performed, the bank paying the vendor is at fault. This fault has serious consequences: it can deprive the lender of its right to obtain repayment of the capital. For the borrower, this is an extremely effective defence, as it can lead to the debt being cancelled outright. This argument is a powerful lever in legal proceedings to avoid the forfeiture.
5. What recourse does the borrower have if the loan is accelerated?
Faced with the threat of an acceleration of repayment, or once it has been pronounced, borrowers are not helpless. There are a number of remedies, ranging from negotiation to legal action, that can be used to find a solution and protect your assets.
The first step is often to negotiate with the lender. It is sometimes possible to obtain a rescheduling of the debt, a payment schedule for overdue instalments, or even an overall repayment plan. If negotiations fail, legal action becomes the main option. With the help of a lawyer, the borrower can then raise all the arguments set out above: the absence of a prior formal notice with a reasonable deadline, the unfair nature of the forfeiture clause, or even fault on the part of the bank in granting the loan or releasing the funds. As a last resort, if the financial situation is seriously compromised, the over-indebtedness commission can be called in to suspend proceedings and draw up a recovery plan, thus avoiding lengthy and costly litigation. To find out more about over-indebtedness procedureTo find out more, visit our dedicated page.
Faced with the complexities of acceleration and banking procedures, the support of a lawyer is essential. For an analysis of your situation and to take advantage of our expertise in banking lawIf you have any questions, please do not hesitate to contact us via our website.
Sources
- French Consumer Code, in particular articles L312-1 et seq (consumer credit) and L313-1 et seq (mortgage credit).
- Civil Code, in particular articles 1171 (unfair terms in adhesion contracts) and 2288 et seq (surety bonds).
- Case law of the Cour de cassation (in particular Cass. 1re civ., 3 June 2015, no. 14-15.655, Bull. civ. I, no. 131; Cass. 1re civ., 22 March 2023, no. 21-16.044).
- Case law of the Court of Justice of the European Union (in particular CJEU, 21 Nov. 2002, Cofidis, C-473/00; CJEU, 26 January 2017, Banco Primus, C-421/14).
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