How to Avoid a Commercial Loan Default & Foreclosure Litigation

When running a business, taking out a commercial real estate loan can be a necessary step to achieve financial stability and growth. However, there may come a time when repaying the loan on time becomes challenging and the possibility of defaulting arises.  

 

In such cases, foreclosure litigation is likely to follow, which can be a costly and lengthy process for both the borrower and lender. In this article, we explore several options to avoid commercial loan defaults and foreclosure litigation.  

 

What Happens When a Business Defaults on a Commercial Loan?  

 

Defaulting on a commercial loan can have serious consequences for any business. A default occurs when a borrower fails to make payments as agreed upon in their loan agreement. In most cases, the lender will give the borrower notice of default and the governing loan documents will be a stated period of time for the borrower to cure the default (by paying the missed payment).   

 

For businesses that rely on commercial loans to fund their operations, such as developers and commercial property managers, defaulting can result in foreclosure or bankruptcy.  

 

• Foreclosure occurs when the lender asks a court to sell the mortgaged property that secured the loan in order to pay the lender the amounts due on the defaulted load.    

• Bankruptcy is a legal process where the business declares they are unable to pay back debts and must restructure or liquidate assets to repay creditors. 

 

Foreclosure Litigation 

 

Foreclosure litigation is a legal process that occurs when a property owner fails to make payments on their loan and the loan is secured by a mortgage on the borrower’s property.  In general, when the borrower falls behind on their payments and can’t cure the default, the lender will file a formal lawsuit against the borrower and any other parties that may have an interest in the property – including holders of junior mortgages. The foreclosure lawsuit will seek to enforce the terms of the loan and recover the amounts due, and to foreclose on the mortgage – which means that the court will order the property sold and the proceeds be given to the lender to be applied against the amount of the defaulted loan.   

 

Options to Avoid Foreclosure  

 

If a business is facing financial difficulties and struggling to keep up with its mortgage loan payments, foreclosure may seem like an inevitable result. However, there are several options available that can help them avoid foreclosure and subsequent litigation.  

 

#1. Loan Modification 

 

This involves communication with the lender and renegotiating the terms of the loan to make it more likely that the loan payments will continue to be made.  The borrower will typically provide the lender with supporting financial documents to justify the modified loan terms.    

 

#2. Forbearance  

 

Essentially, forbearance means that the lender agrees not to move forward with the foreclosure proceedings where the borrower provides additional concessions to the lender in consideration for the forbearance.  This can include catching up on missed payments, providing additional collateral, or agreeing to a repayment plan. 

 

#3. Short Sale  

 

In a short sale, you sell your property for less than what you owe on it, but this allows you to avoid foreclosure and negotiate the handling of any deficiency with the lender.   

 

#4. Deed in Lieu of Foreclosure 

 

Another option is to transfer the property title to the lender in exchange for full or partial payment of what is owed. This process, known as a deed-in-lieu of foreclosure, allows borrowers to avoid the lengthy and often costly process of foreclosure while also giving lenders control over the property.  

 

In some cases, lenders may even agree to forgive any remaining debt or even release individuals (usually the owner of the borrower business) from personal guarantees after they take possession of the property. This can provide borrowers and their owners with much-needed financial relief and allow them to move on from their troubled businesses without further losses.  

 

#5. Bankruptcy 

 

The bankruptcy process has several options for a troubled business depending on the company’s prospects for the future.  One of the key features of any bankruptcy filing is the application of an automatic stay against creditor enforcement of claims and defaulted debt, which temporarily halts foreclosure proceedings and other legal actions following a loan default. There are various types of bankruptcy relief available.  Chapter 11 bankruptcy permits a reorganization of a business’s assets and liabilities to allow it to emerge from bankruptcy and continue the business.   There are various sub-types of Ch. 11 proceedings as well which provide different potential relief and have different limitations.  Chapter 7 bankruptcy is a full liquidation of assets to spread amongst a company’s creditors.  Chapter 13 bankruptcy proceedings are typically for individuals, but companies operating as sole proprietorships may seek protection under Ch. 13.   

 

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Contact the Frazer Firm P.A. to Assist with your Real Estate Litigation Needs  

 

Commercial loan default and foreclosure can be devastating experiences for any business owner.  Private lender businesses also must have skilled business and real estate litigation counsel to ensure the timely and efficient enforcement of their loan documents.  Whether your company is a commercial loan borrower or lender, the skilled business and real estate litigation attorneys at The Frazer Firm can help your company navigate these complex legal issues.   Contact The Frazer Firm P.A. today to help protect your business from legal risk.