Being a business owner can be rough in the best of times. When the entire economy is taking a hit, it gets even harder to hold everything together.
Many businesses of all sizes are contemplating bankruptcy, or are already going through the process. And there are certainly situations where bankruptcy is your best option: it’s there for a reason, and you should take advantage of it if you need to.
In many instances, though, a bankruptcy is going to jeopardize your ownership of any business real estate. If you plan on continuing your business in the same location, or have other plans for the property, or simply don’t want to lose your investment in it, a bankruptcy isn’t your best bet. In most cases, you’d have to file a Chapter 13 bankruptcy, which means setting up a payment plan to pay back all of your creditors a portion of the debt you owe—not just on the property, but on all of your business debts.
Then, in addition to staying current on that payment plan, you’d need to start making full and on-time payments on your mortgage again. If you fall any further behind than you were when you filed for bankruptcy, your lender could still foreclose.
If the situation changes quickly and revenue starts coming in, you might be able to catch up and keep up with your payments (of course, if that’s the case you may not need to declare bankruptcy at all). If you’re expecting a longer period in the economic doldrums before you can ramp back up to full steam, this is a risky bet.
So what can you do to protect your business’s real estate when you can’t afford the mortgage? The answer is every lawyer’s favorite: it depends.
Judicial Foreclosure vs. Non-Judicial Foreclosure
In some states, called “judicial foreclosure” states, lenders are required to file in court before they start foreclosure proceedings on your property. This is a largely pro forma routine, meaning courts are used to rubber-stamping foreclosure requests from lenders, and many of them go unchallenged. But judicial foreclosure means the lender is required to serve you notice of the proceeding before it happens, so you have a chance to fight your foreclosure in court before the ball ever starts rolling.
In “non-judicial foreclosure” states, as you might expect, lenders don’t have to file in court before the foreclosure process starts. However, you’ll still be notified when the process begins, and then you can file in court to try to prevent the foreclosure. This isn’t ideal in some ways, though it also lets you rather than the lender put the first argument in front of the court. And because courts in non-judicial foreclosure states don’t rubber stamp proceedings quite as frequently, you might be able to pique the court’s interest a little easier.
Whether you’re in a judicial or a non-judicial foreclosure state (click here or scroll to the bottom to find your state), you’ll want to use the courts to your best advantage. That means showing up to the proceedings (with a lawyer, of course) and making the best legal argument you can for keeping your property now and paying your lender later.
It can be tricky, but it can be done.
Force Majeure and Other Fancy Ways to Keep Your Business Property
Broadly speaking, courts view loan agreements—including mortgages on real property—as contracts. Parties to a contract have certain obligations to each other, and courts will enforce those contracts. In a standard mortgage contract, you have an obligation to make regular mortgage payments to your lender, or your lender has the right to take your property, or foreclose.
But what if completely unforeseen and unpredictable circumstances prevent you from making payments? The legal concept of force majeure, commonly referred to as an “Act of God”, can relieve parties of their contract obligations when circumstances make performance impossible.
Force majeure defenses against contract claims are most frequently seen when major destructive events like hurricanes, tornadoes, and fires destroy businesses or disrupt supply chains. For other events, like a global pandemic that all but eliminates consumer demand and leads to government shut-down orders, the law isn’t exactly settled.
You might say the law in this area doesn’t even exist.
Still, there’s a strong argument to be made that force majeure should prevent many if not most foreclosures for the foreseeable future. If you’re at risk of losing your business property, lean into the moment and fight to keep it!
You may not need to rely on force majeure, either. There are other contractual provisions and state law protections that might require your lender to ease up and postpone foreclosure actions. The potential defenses against foreclosure are too numerous and complex to detail here, but you should speak to a lawyer before you capitulate to your lender.
Courts Aren’t the Only Way to Prevent Foreclosure
Things with your lender don’t have to get adversarial, either. With record levels of loan defaults looming on the horizon, many banks are becoming more accommodating with temporary forbearance or modified payment terms. Additional legislation might standardize this and bring all banks in line, too.
In short, be proactive, and try to get ahead of the foreclosure curve if you can. And if you can’t, don’t give up hope: foreclosure isn’t a foregone conclusion.
The following Higgins Law article was featured on Forbes.com, to view the article click here:
<a href=“https://www.loanlawyer.law/“>Ohio foreclosure defense</a>