A business foreclosure is a way for a bank to take back business assets if you haven't paid on your debts for those assets. It's common in the mortgage industry to foreclose on a house, and in these troubled financial times it is also becoming more common to foreclose on a business. In these cases, the bank is trying to force payment.
RULE #!: The most important thing for you to remember is this: The bank really doesn't want your business assets; they would prefer to get your payments. Keeping this rule in mind might help you prevent foreclosure or give you some more options.
What to do First
- Talk to the bank if you are not able to pay your bills. The bank may try to work with you to salvage the situation, but if you wait until after you receive the foreclosure notice, it may be too late.
- Talk to a bankruptcy attorney or other specialized financial consultant. Your general attorney or CPA may not be able to help in this situation, but a specialist may be able to provide you with legal options and counsel.
Some Options to Foreclosure
If you are facing foreclosure on your business, you may have some options:
- Borrow money from friends or relatives. If you have anyone who can make your payments for you, it may buy some time.
- Get a temporary restraining order, to stop a forced sale or seizure. This is where your attorney will be helpful.
- Provide a Personal Guarantee. Depending on your personal situation, you may be able to buy some time by doing this. If you have personal assets (like your mortgage-free home) that you can pledge to the bank, you may be able to hold off foreclosure. Of course, this puts your personal assets at risk, and you may not want to do that. If your business recovers, you might be able to refinance and take off the personal assets.
- Refinance, either with the same bank or another bank. It sounds crazy, but sometimes a bank will allow you to refinance the loan (remember my Rule #1 above) to save the situation. This assumes you can get another bank to take the loan when you have already shown your inability to pay, but it's worth a try.
- File Chapter 11 (reorganization) bankruptcy. Declaring bankruptcy might forestall the foreclosure, because it provides for an automatic stay, which suspends active attempts at collections. You will need an attorney to help with the bankruptcy process.
Read more about this subject on my Foreclosure Process Q&A article.Also, remember that my purpose is to provide you with general information so you can talk intelligently to your advisers. I am not an attorney, CPA or tax professional. Consult with your legal and tax advisers in these situations.