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What is an acceleration clause?

An acceleration clause is a provision commonly found in contracts, particularly loan agreements or mortgage contracts, that allows the lender or creditor to demand immediate payment of the entire outstanding balance if certain specified conditions are not met. It provides the lender with the right to accelerate the repayment schedule and declare the loan or debt due in full before its original maturity date.

The conditions that trigger the activation of an acceleration clause may vary depending on the specific terms of the contract. Typically, common triggers include:

1. Default: If the borrower fails to make timely payments, violates any terms or conditions of the agreement, or breaches any covenants, the lender may invoke the acceleration clause.

2. Bankruptcy: If the borrower files for bankruptcy or becomes insolvent, the lender may accelerate the repayment.

3. Change in ownership: In some cases, a change in ownership or transfer of the property securing the loan without the lender’s consent may trigger acceleration.

When the acceleration clause is invoked, the borrower is typically required to repay the entire outstanding balance, including any accrued interest or fees, immediately or within a specified period, as stipulated in the contract. Failure to comply with the accelerated payment demand may result in further legal actions or consequences, such as foreclosure on the property or collection efforts.

Acceleration clauses serve as a protective measure for lenders, providing them with the ability to mitigate potential risks and ensure timely repayment. For borrowers, it highlights the importance of adhering to the terms of the contract and meeting their financial obligations to avoid triggering the acceleration clause and facing significant financial consequences.