What is business foreclosure?
A foreclosure is a legal process which involves the attempt of a lender to recover the balance of a loan from a borrower who has refused or is unable to service the debt. Whenever a business owner wants secure a business loan, the lender will often require that a security –oftentimes a property or other asset–be used as a guarantee to secure the loan. The loan will then be issued subject to certain terms and conditions, including repayment terms.
As time progresses, if the borrower consistently fails to comply with the terms of the loan, especially as regards repayment, the lender will approach the law courts in an attempt to recover their loan amount, including any additional interests and other incidental costs. This will usually happen by securing a court order to sell off the security deposited by the borrower to recoup the loan.
Therefore, a business foreclosure might involve both the sale of the mortgaged asset(s), in addition to any other (accumulated) assets of the business, in a bid to recover said loan.
It should however be stated that several states in the U.S. provide for the principle of Statutory Redemption, which refers to the right of a borrower to redeem his or her property by paying off the foreclosure sale price, plus any relevant interest and fees. Gladly, there are different legal foreclosure defenses that can be used depending on your specific circumstances. These foreclosure defenses will also vary from state to state. Some of the available foreclosure defenses will be discussed further along in this article.
The following are several important facts to understand about business foreclosures:
Some Important Things To Know About Business Foreclosures.
1. Why Exactly Does Foreclosure Happen?
Though a foreclosure can happen to any business owner who has fallen into difficulty in repaying a business loan, mortgage installments or other reasons, there are often different reasons associated with this inability to repay a loan. Some of the reasons are:
- Financial carelessness of the business owner: This is one of the most common reasons for foreclosures. An inability to repay a loan is not always as a result of no source of income or even debt overload. Many individuals or business owners often incur a loan liability without any self-discipline or clear vision as to exactly how that loan will be used and managed. In some occasions, many people have been known to use business loans for reasons other than which the loan was initially taken, usually leading to an unproductive loan and consequently an inability to repay, which leads to foreclosures.
- Loss or reduction of income: It is not impossible that despite an individual’s best efforts and proper use of a loan, the business still does not do well and falls into difficulty, which leads to a loss or reduction of business income and difficulty in repaying a loan.
- Other reasons for foreclosures include medical reasons or death of the business owner, business bankruptcy or closure, relocation and so on.
2. Steps Leading To a Foreclosure
A foreclosure does not happen instantaneously or overnight. It will usually begin with several missed repayments by the borrower, usually over several months. Once the lender is alerted to these missed payments, they will usually send take three steps or actions before an eventual foreclosure:
- You will receive a “Notice of Default” to inform you that you are behind on your payment, as well as how much you are behind on, with a request to restore your loan to it’s current status, so as to avoid it becoming delinquent. After this, the lender will likely give the borrower some time to respond to their notice and to catch up on their payment, or otherwise restructure the loan.
- If they get no response to their notice of default, they will then issue a “Notice of Acceleration,” which essentially is a requirement by law, by which you are given one last opportunity to fully repay your loan amount in full, or else lose your collateralized asset.
- If you are yet unable to address this acceleration notice and repay your loan, the lender will usually proceed to issue you with a “Notice of Sale” of your asset, once they have obtained the necessary court order permitting them to do so. You can generally consider this stage to be the beginning of the foreclosure process, remembering that, depending on the type of contract you signed and if the assets of the business were also mortgaged, such a foreclosure might include the sale of the business’s assets, which essentially might spell the end of the business.
3. Foreclosure Auction
Once the date on a Notice of Sale is reached, what happens next is the commercial sale or auction of the collateralized assets. The main objective of this sale or auction is to recover as much of the loan amount as possible. Unfortunately, there is no guarantee that the lender will recover all of their loaned amount, plus interests and/or incidental costs of the foreclosure process, and this is part of the risks they incur in their business. On the flip side, they may be able to earn over and above the outstanding loan amount, and consequently make a profit.
At this stage, it is usually almost impossible to stop a foreclosure from happening, thee one thing you can perhaps do is to delay the foreclosure proceedings by filing a bankruptcy. Some skilled lawyers will likely have other tactics to help delay this foreclosure process.
As a side note, one question we often get from some of our clients who are lenders is: “can you sell a house with a lien on it?” The simple answer to that question is, yes. However, a more appropriate answer is that it depends.
4. Foreclosure Defense
Bankruptcy is not the only way to save an asset from foreclosure. There are other foreclosure defenses that can be used to delay or stop the foreclosure if the lender has not properly followed the state procedures for the foreclosure process, or if any other extenuating circumstances come into play.
However, it should be noted that not all foreclosure defenses can completely stop a case of foreclosure. Some may delay or restart the process, and either option can be advantageous as it may give you more time to come right with your loan payment thereby ultimately preventing the foreclosure in the long run.
Some noteworthy foreclosure defenses that can delay or potentially stop the process are:
- Predatory lending
- Statutory violation
- Error in the mortgage agreements
- Fraudulent conditions on the mortgage documents
- Issues with the promissory notice
- Interest rates violating state or federal law
- Failure of the lender to follow the standard procedures for the foreclosure process
If you think you have a solid defense to foreclosure, you should get an attorney immediately,
5. How Can a Business Foreclosure Be Stopped
Businesses that use a loan or credit line to buy equipment, assets or otherwise use it to fund an operation or project, and eventually default on the repayment plan on that loan have the tendency to be foreclosed on by being sued in a foreclosure action in the court or by the power of sale clause.
Though most lenders would usually prefer not to foreclose on a collateralized asset because of the costs and inherent the risk of potentially not recovering their principal loan amount, they often will ultimately will have no choice but to do exactly that should push come to shove.
The following are some of the ways to stop a business foreclosures:
- Get in contact with your lender and request for a loan modification option such as reduced interest rate, extension of the loan term, having the arrears paid at the back end of the loan or a forbearance program.
- Refinance the loan. Search for alternative sources of finance to fund the payment of the arrears. Alternative sources such as private or commercial debt instruments such as equity or collateral loan, or using retirement funds and/or sales of equipment.
- If the arrears cannot be paid through any means, the asset or property can be yielded to the lender in the light of foreclosure. This is done through the Deed-in-Lieu of foreclosure. Get the lender to sign a “without recourse” agreement which prevents being sued personally for loan deficiency.
- Get an attorney to file for bankruptcy protection.
6. Liabilities After The Foreclosure Process
If you lose your property or asset as a result of a foreclosure, you may still be liable for any taxes that may be due on the property before it was foreclosed. Similarly, if the sale price of the foreclosed item is less than the balance owed on your loan, the extra amount owed is known as a loan deficiency, and oftentimes, the lender may still seek to recover this amount. Sometimes, they may simply write it off.
Worthy of note also, is the fact that if the loan deficiency is cancelled by the lender, the Internal Revenue Service (IRS) or the state taxing authority may treat the cancelled debt as an income and may consequently be taxable. There are times when such cancelled debt is not taxable, such as if the cancellation of debt is incurred in a bankruptcy proceeding.
7. The Importance of Hiring Foreclosure Attorneys
You might consider hiring a foreclosure attorney to help handle your mortgage issues, prevent foreclosure or even get a loan modification.
A foreclosure attorney will be helpful to you by:
- Filing for a Notice of Appearance (NOA) with your bank and the court so that they get involved in your case and officially represent you.
- Answering summons and pointing out the mistakes made in the complaints by your lender.
- Attending and representing you at settlement conferences.
- Creating foreclosure defense strategies while pursuing a permanent solution such as loan modification to prevent foreclosure.
- Assisting you to get a loan modification.
- Providing you with a good judgment based on their experiences
If your business is about to be foreclosed on, and you are unable to do service your loan, the best thing you can do is to speak to an attorney to see if they can come up with a workable solution that can give you a chance at stopping the foreclosure, or at the very least, delaying it to buy you some time.