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An intercreditor agreement is an agreement between one or more creditors who have shared interests in a particular borrower. The agreement spells out aspects of their relationship to each other and to the borrower so that, in the event a problem emerges, there will be ground rules in place to handle the situation. The specifics of an intercreditor agreement vary depending on the borrower, the type of debt, and other factors, such as the presence of cosigners.
Intercreditor agreements provide information about lien positions and security interests. They also discuss the liabilities and rights of the parties involved. For example, a bank might indicate that it has a security interest in a vehicle, which means that another creditor cannot confiscate and sell the vehicle to satisfy a debt, because the bank has the first right to do so. Likewise, an intercreditor agreement might provide information about liens on other property, such as real estate.
Creditors are not all created equal. An intercreditor agreement spells out the differences between different creditors and their rights in the event of a bankruptcy or default. The agreement may also include a buyout clause, which gives one creditor the option of buying out another creditor's debt, usually in response to a trigger event such as a bankruptcy filing.
Some creditors may use boilerplate language and generic contracts for working out an intercreditor agreement. Others may draft an agreement which is specific to a situation with the assistance of lawyers from all of the creditors involved. In such cases, the lawyers work out the details with each other with the goal of creating an agreement which will be amenable to everyone. This may be necessary in cases where creditors are owed large amounts of money or when a situation is complex and cannot be adequately covered by a generic contract for the creditors involved.
Creditors can make arrangements of this nature without the consent of the borrower, just as they are free to sell debt without asking the borrower. Borrowers may be notified after the fact about sales of debt and other agreements which are made in regards to their debt. It is advisable to read notices sent from creditors with care in case they contain important information, such as changes in repayment terms or notifications about changes to the lending agreement. Debtors do have the right to contest changes made to their lending agreements, although if they do, the creditor may refuse to extend additional credit or demand payment in full.
@KaBoom - I did a bit of reading online about intercreditor agreements. It looks like they are are used most often in the business sector, specifically for project financing. It seems like it would be pretty rare for an intercreditor agreement to exist about an individual.
I don't think that intercreditor agreements are always necessary. I definitely think that sometimes the creditors rights are implied, or spelled out in other contracts.
For example, if one bank has a secured loan with the borrower, they would obviously have the right to whatever the loan was secured with. If another bank gave that customer an unsecured loan, they would have to recover their money from other assets in the even of the customers bankruptcy.
I imagine it might get a bit more complicated if the creditors are dealing with a business rather than an individual though.
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