Any business can go into foreclosure, and this will often lead to the business being dissolved. Bills pile up, sales stall or a late supplier can cause a business to go from being financially stable to entering into foreclosure proceedings.
It's a trying and scary time for a business.
You do have some recourse to avoid being stuck in foreclosure and extend the lifeline of your business.
1. Loan Modification
Lenders will work with you to find a common ground. Many lenders would rather work with a business to modify the loan than get pennies on the dollar through foreclosure or bankruptcy. The lender may even offer a short period where no payments are necessary.
Partial payments for a specific period of time may be possible, too.
When requesting a loan modification, you can also ask for:
- Extended Loan Periods: An extended loan period may keep your business in debt for a longer period of time, but the extension will also help to lower loan payment requests, which can lower the loan's premiums dramatically every month.
- Interest Rate Reduction: Lenders make a lot of money off of high interest rates, but they make a lot less money if you don't have the means to pay the loan back. Businesses have leverage when they're about to go through foreclosure, whether it be for property, buildings or equipment. Request an interest rate reduction to lower premiums and the total money paid back over the long-term.
The loan may have one or two revisions put upon it: or forbearance. When you have an arrears put on the modified loan, this is often done on the backend of the loan. You'll still pay back the money, and the arrear isn't a negative consequence.
Forbearance, as discussed prior, can relieve your responsibilities of paying full payments for a short period of time. For example, if a supplier is holding up an order's completion, a period of two months may be given where you don't need to make payments in their entirety.
2. Relinquish Property or Assets
Loan modifications may not be enough to satisfy back payments, and if this occurs, the main point to remember is that the lender simply wants their money. There's no malice on part of the lender, but they need payments made to satisfy their board members and potential stockholders.
A business can choose to relinquish property or assets to avoid foreclosure.
"Deed-in-Lieu" is a legal remedy that is used in these situations. What this does is relinquish ownership of the property to the lender. The lender will be made whole again through the relinquishment, and everyone is happy.
You will need the lender to sign a "without recourse" agreement.
The agreement will ensure that the lender will not sue you for the remainder of the balance.
This is a tricky scenario to be in for a business because you may find that the property being relinquished isn't:
- Enough to satisfy the full balance of the loan
- Enough to satisfy the back payments
- Given a full value from the lender
You'll need to sit down and do the numbers to determine if relinquishing property is the best option for you. Oftentimes, this will allow the business time to return to profitability and hopefully start making payments on time, if necessary.
3. Bankruptcy Protection is an Option
Bankruptcy protection can be sought when foreclosure seems imminent. The foreclosure can be blocked when the business chooses to go through bankruptcy, including:
- Chapter 7
- Chapter 11
- Chapter 12
- Chapter 13
Federal protection can be sought in all four of these bankruptcy types, and this will still require that you make the lender whole again. The basics of bankruptcy filings and protection are:
- Chapter 7 - This form of bankruptcy will require liquidation. The property is given back to the lender, while the creditors will be able to sell off your assets.
- Chapter 11 – This form of bankruptcy is ideal and common because it allows the business to remain operational while allowing the business to reorganize and keep their property in the process.
- Chapter 12 – A form of bankruptcy that is only available to two select groups: farmers and fisherman.
- Chapter 13 – This form of bankruptcy allows the debtor to come to an agreement with the lender to repay a portion of the loan and make missed payments over a period of time. This leaves more options open to the business and satisfies the lender, too.
While bankruptcy protection will stall foreclosure, there needs to be progress made in the discussions so that an agreement is made promptly. A lawyer is the best option to handle these , and they'll help guide you through the right form of bankruptcy for your business.
Before foreclosure causes your business to dissolve, work on avoiding foreclosure utilizing the methods and tips above.