What Can a Bank Do to Liquidate Collateral For a Defaulted Loan?

October 29, 2009 by  Filed under: Loans 

Typically and in most instances the banks have only one plan. Foreclose, take possession and liquidate by auction. They have few options or alternatives. It is expensive as lawyers, auctioneers, advertising, insurance, storage, etc. must all be paid while liquidating, which of course reduces the net gain to the bank from the process.

They can do little else. Of course coupled with this may be the liquidation of inventories, the sweeping of bank accounts, the collection of remaining accounts receivable and eventually moving onto the liquidation of personal assets such as your home under your personal guaranty. But it is most always liquidation by foreclosure auction.

There is one additional option, which while usually played poorly by the banks, occasionally works out. The borrower in default must be aware of this option: selling the business to another buyer.

Yes, recently the bank asked the borrower in default to continue to run the business, unhindered, while the bank searched for a buyer. The bank sought out assistance from a number of business brokers, and actually reached out to their own bank network of possible buyers searching for a buyer.

In this particular example, the bank found a buyer making a very reasonable offer reducing the losses to both the bank and the borrower.

Is this good or bad for the defaulting borrower? It is hard to say. It is good as it does reduce the shortfall owed. It is bad as it remove the opportunity for a life saving workout, which preserves the assets and provides a workout opportunity for the defaulting borrower. Typically in a foreclosure situation, the bank may be willing to work out a resolution which allows the business to continue in some form. If the bank attracts a sale, the debt is reduced and this option ends.

It is just something to be aware of.

Donald Todrin is the CEO and Founder of Second Wind Consultants, Inc who specializes in SBA Loan Workouts, business debt forgiveness and solving difficult business problems in general. Don has authored dozens of articles on SBA loan default and debt workouts. Follow Don on Twitter and join his Facebook fan page.

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