What Can A Bank Do To Liquidate Collateral For A Defaulted Loan?

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. are all necessary expenses while liquidating. This, of course, reduces the net gain to the bank from the process.

They can do little else. 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 and the borrower in default must be aware of it. This option is selling the business to another buyer.

In a recent example, 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 in 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’s hard to say. On one hand, it’s good, as it does reduce the shortfall owed. But its also bad as it removes the opportunity for a life-saving workout that 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 that allows the business to continue in some form. If the bank attracts a sale, that ends this option although reducing the debt.

It’s something to be aware of.