Posted on Jun 06, 2017 by Harriet P. Wallace
A business owner with visions of growth doesn’t borrow money thinking he or she won’t be able to pay it back. Sometimes, though, dreams don’t go according to plan.
When loan payments are late or missed or stop altogether, a loan will go into default, meaning the borrower hasn’t met his or her obligations when it comes to the agreement to repay. As difficult as that may be for a business to face, the situation won’t just go away by ignoring it.
Most business loans involve real estate, but they may also be secured with equipment or inventory as collateral. Defaulting on a loan places those assets at risk of foreclosure or liquidation.
Communication is Key
When a business is unable to make payments, it’s vital to contact the lender to discuss the situation. The lender doesn’t want to own property or equipment; it wants the debt to be repaid. It’s in both parties’ best interests to work out a payment solution.
Being proactive with the lender will give the borrower a better chance of negotiating a payment plan or restructuring debt, known as a “loan workout.” The lender’s costs increase if it must go to great lengths to track down the borrower seeking payment. When the lender hires attorneys, there’s less room to negotiate with the borrower.
A business that is seeking to negotiate a plan to repay a loan in default should expect to provide plenty of supporting documentation. As in any contractual relationship, there’s a duty of good faith and fair dealing where the parties must be honest with each other. The lender may ask for current personal financial statements, two or three years of tax returns and a letter explaining the hardship.
Most importantly, the borrower will need to provide a written proposal of what he or she can do to repay the loan. Businesses may expect the lender to come up with the solution, but the lender isn’t going to negotiate against itself. A business can propose terms, and the lender may suggest changes.
If a business can’t make its mortgage payments, it is usually better off trying to sell the property on its own to fetch a higher price. The business may be able to work with the lender to take a reduced payoff rather than letting the property go to a foreclosure sale.
A property may be sold at a short sale, in which the net proceeds from selling the property fall short of the amount of debt. A common misconception is that the borrower won’t face a judgment for the remainder of what’s owed. The lender is still entitled to the shortfall, unless there’s a specific agreement to waive the rest of the borrower’s obligation.
In a new trend, lenders increasingly are going after the full amount of what’s owed. As the economy has improved, businesses’ assets have grown and there has been a big push to pursue those assets to try to collect. Judgments last for 10 years, and can follow the borrower in any county and state where the defendant has assets.
Until the lender obtains a court judgment, borrowers still can try to work out a payment plan with the lender. However, it’s rarely a good idea for a borrower to let a loan go to litigation. By establishing an open dialogue with the lender, a business that is having trouble making payments can keep a bad situation from getting worse.