Often times, if you are the debtor or the person that owes the lender money, the lender will typically have a cross default provision in its documents. That means if you have any other loans with that bank, a default on one loan means a default on all loans with that lender. If you have any accounts (i.e., savings, CD’s personal checking etc…) with that same lender, even if they are unrelated to the defaulted business, the loan documents you previously sign as a distressed buyer may permit the lender to seize those dollars to satisfy any monies owed to the lender, even though they are in separate accounts and have nothing to do with the business.
Debtors need to recognize that if they are becoming insolvent and the company’s future is in question, the debtor needs to ensure they pay various liabilities that they will be on the hook for, even if they are forced to file bankruptcy. A couple of examples: (i) no discharge of income taxes in a bankruptcy for taxes that became due within the last three years prior to bankruptcy; (ii) no discharge on various employment taxes that were not paid before bankruptcy, (iii) no discharge of certain property taxes payable within one year before bankruptcy.
Some debtors need to also realize the lender may send a notice to all of their account holders, claiming the accountholders should forward all payments due the company to the bank directly. Lenders may do this before any court action or court order. This notice could undermine the accountholder’s confidence in the company to perform the work they contracted for. Some banks may send this notice even though they are not the first secured party. It can also create confusion for all parties because the accountholder may be confused as to where and who to make the payments to, absent a court order.
Assuming a debtor has a bank loan with an outstanding balance for $1,000,000. Also, assume the debtor is able to identify some investors to buy the note and security documents of the lender for $600,000. One key point is the debtor needs to ensure that he or she is not going to be subject to an income tax liability for discharge of indebtedness for the $400,000, the lender did not receive. This alone could be devastating to a debtor who is trying to re-establish and rebuild him or herself.
These are just a few of the issues. Many moving parts and these situations are often dynamic. If you are a cash buyer (i.e., meaning you don’t need financing to close on acquiring distressed property…cash is “King”). Although you can close quickly on an attractive transaction, beware and take the time to get the appropriate due diligence done so you aren’t stuck holding the bag. I am available for a free phone consultation 313. 468.4932. I have been a licensed attorney for over 18 years and have served in numerous legal capacities.