What is Cross-Default? Plain English Explanation
Definition
A cross-default clause means that defaulting on one agreement automatically triggers a default on another. If you miss a payment on Loan A, you are also considered in default on Loan B, even if you are current on Loan B.
Why It Matters in Contracts
Cross-default clauses can create a cascading financial crisis. One missed payment or technical default can trigger defaults across all your loan agreements simultaneously, potentially leading to acceleration of all debts at once.
Real-World Example
A business has three loans with cross-default provisions. They miss a covenant requirement on one loan. All three lenders now declare the business in default and demand immediate repayment, turning a minor issue into a potential bankruptcy.
What to Watch For
- 🔴Cross-default with unrelated agreements
- 🔴Low threshold amounts that trigger the provision
- 🔴No cure period before cross-default kicks in
- 🔴Cross-default triggered by technical (non-payment) defaults
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Disclaimer: This glossary entry is for educational purposes only and does not constitute legal advice. Consult a qualified attorney for guidance on your specific situation.