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WHAT YOU CAN DO WHEN A COMMERCIAL BORROWER DEFAULTS

What happens when a borrower defaults on a loan secured by commercial property? Lenders have a number of options for how to proceed, but that’s part of the problem – which course of action is the optimal strategy for protecting the lender and achieving maximum collections? There are way too many possibilities to discuss in one article, but here are a few examples to get you thinking.

The forbearance agreement is a short-term agreement between the lender and the borrower. In it, the lender agrees to delay enforcing their rights in exchange for the borrower agreeing to cure the default within a specified period of time. The only thing a forbearance agreement does is delay collection proceedings – it does nothing to the terms of the loan. If the borrower fails to pay what they owe by the new deadline, collections may move forward.

Whether the borrower is looking to refinance or sell the property, the lender must begin receiving payments. But it may not actually be the best thing to collect the rent if there’s already a property manager in place to maintain the property and take care of all other related management activities.

The next option is a loan modification. It shares a number of features with the forbearance agreement, but has a few key differences. For one thing, the loan modification does change the terms of the loan. Second, the loan modification results in the cure of the default, which means another default after modification will require the lender to start the foreclosure process over again. This won’t meet the lender’s goal of getting the full balance paid, but may still be preferable to immediate foreclosure.

Another option that helps avoid foreclosure is a deed in lieu of foreclosure. This essentially transfers the deed to the property to the lender in exchange for agreeing not to foreclose against the property. The borrower may pay a lump sum in order to get the lender to release the lien. Most of the time, the lender isn’t interested in owning the property, but if they’re going to own it at the end of a tedious and expensive foreclosure process anyway, the deed in lieu of foreclosure can be an enticing choice.

Lastly, you can opt to take the foreclosure route, probably the most familiar strategy for dealing with default. There’s both a judicial and nonjudicial method of foreclosure. The judicial involves filing a lawsuit for foreclosure, while the nonjudicial is a trustee sale. The lender’s fastest remedy is to file the judicial foreclosure in conjunction with an application for placement of a receiver on the property.

It’s the receiver’s job to manage the property under court authority, ensuring that the borrower won’t abscond with the collected rent, that the property is maintained and managed properly, and that the lender receives debt service to slow the increasing outstanding balance. While commencing the foreclosure lawsuit and seeking a receiver, it’s usually a good idea for the lender to simultaneously start the nonjudicial foreclosure process.

From forbearance agreements to foreclosure, lenders have plenty of options for dealing with a default situation. Which one is best for your unique circumstances? That’s a determination best made with the help of legal counsel and your accountant. How you respond to a default can make a substantial difference in how much money you reclaim.

Copyright all rights reserved. Financial Forensic Services, LLC 2020 Brief quotation with attribution permitted. 

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“As an environmental law firm, we use Joe Dickerson to locate prior business owners and do corporate genealogies. He is persistent, that’s the key to a good investigator, and he has a knack for understanding how people move money and do business. That tells him what rocks to look under. Joe is vastly superior to other investigators in two ways: he lets you know what’s going on and he’s honest with you, because he tells you if there’s really anything there worth pursuing. He is unusually thorough and creative finding people. Joe has earned his fee every time.” “If the information is to be found, then I believe that they will find it. Their service enabled me to do a much better job for my client.”

Tim Gabelhouse
, Attorney at Law

2014-11-11T18:20:41+00:00

Tim Gabelhouse
, Attorney at Law

“As an environmental law firm, we use Joe Dickerson to locate prior business owners and do corporate genealogies. He is persistent, that’s the key to a good investigator, and he has a knack for understanding how people move money and do business. That tells him what rocks to look under. Joe is vastly superior to other investigators in two ways: he lets you know what’s going on and he’s honest with you, because he tells you if there’s really anything there worth pursuing. He is unusually thorough and creative finding people. Joe has earned his fee every time.” “If the information is to be found, then I believe that they will find it. Their service enabled me to do a much better job for my client.”

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Frank Brainerd, Retired
Banker/Attorney

2014-11-11T18:20:20+00:00

Frank Brainerd, Retired
Banker/Attorney

“When I was general counsel for First Interstate Bank, I used Joe Dickerson for locating assets, investigating behavior and asset discovery. He did excellent work and always got the information I needed without compromising the bank in any way. He’s more thorough and kept in better touch with me than other investigators. I’d give him a grade of 96 or 97 out of 100.”

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Andrew Quiat
, Attorney

2014-11-11T18:12:51+00:00

Andrew Quiat
, Attorney

“Joe is the most competent investigator I’ve ever found. He has rare ability to find hidden assets. Others claim it, Joe has it. He understands the Rules of Evidence, he knows how to talk to people to develop a fact pattern, and he has a sixth sense for fraud. Joe has unquestioned integrity and delivers value for his services.”

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Thomas E. Root, 
Attorney

2014-11-11T18:20:05+00:00

Thomas E. Root, 
Attorney

“Joe spends the time to understand the problem from the client’s perspective and from the legal perspective. He is intelligent, tenacious, willing to work as hard as it takes, thorough, well-informed, and just awfully good at what he does.”

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R. Michael Sentel
, Former Section Chief Legal Division, FDIC

2014-11-11T18:13:08+00:00

R. Michael Sentel
, Former Section Chief Legal Division, FDIC

” I was prepared to dismiss a federal case involving millions of dollars against a local individual who claimed to have no substantial assets. After your staff hit the records and delved into the transactions behind the transactions, you discovered the individual to actually be worth a few million dollars. We continued the case to conclusion. We were also very happy with the financial background examinations you conducted of the former directors of two failed national banks. The heart of any civil case is whether there is a pot at the end of the lawsuit. You were our lucky leprechaun in finding such pots.”

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Jan Schlichtman
, Attorney at Law

2014-11-11T18:20:55+00:00

Jan Schlichtman
, Attorney at Law

“Joe Dickerson is the industry standard. You can measure the rest by what he does, and I say that without equivocation. Joe has incredible insight into the dark world of fraud. He understands the devious ways in which people perpetrate white-collar crime.”

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Jim Thomas
, Prosecuting Attorney

2014-11-11T18:21:32+00:00

Jim Thomas
, Prosecuting Attorney

“They went overboard in providing excellent service. I was very pleased with what they provided for me as their end product. Financial Forensic Services really understands how a case needs to be put together in order to be presented to a jury. Their PowerPoint presentation tied everything together. It was thorough, it was concise, and it got the job done.”

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Michael Whalen, 
Businessman

2014-11-11T18:21:13+00:00

Michael Whalen, 
Businessman

“Financial Forensic Services did an excellent job in the way they executed my case. They were very straightforward. They stated what they could do for us and they did it. And, from a personal standpoint, they are excellent. Both my wife and I felt very comfortable working with them.”