What’s Ahead For Lenders And Creditors As The COVID-19 Dust Settles
Lenders and other creditors will soon be dealing with their borrowers’ or customers’ delinquent loans or accounts as businesses everywhere try to recover from the many consequences of the virus. Here are some tips and insights that may help you with those issues.
1. What should you expect to hear from your delinquent borrower or customer?
Many of them will be asking you for more time to pay. Your customers may be facing unprecedented financial challenges due to the COVID-19 pandemic. As a result, they may request more time to pay. Some lenders are already offering to defer payments for two months or longer. Even if you’re not a bank, you may want to consider allowing some flexibility for your customers. If you decide to allow them more time to pay, make sure you agree to the new arrangement in writing.
What if you have collateral securing your loan? Now would be a great time to inspect that collateral, make sure it is intact and well cared-for, and ask your customer to provide proof that casualty insurance covering it is up to date.
Your customers may tell you they are applying for federal or state loan or grant assistance. If they are tying those events to your next payment, ask them to keep you updated on the progress of those applications. Once the money comes, you may want to insist on a payment.
“Bankruptcy” may be a word you hear from some customers. When your customer refers to that option, you should talk to a lawyer. The recently passed CARES Act allows more businesses to qualify for the more debtor-friendly provisions of the Small Business Reorganization Act, which may give a small business a better chance of reorganizing in a Chapter 11 bankruptcy case. While many businesses will not benefit significantly from a bankruptcy, others will. Your lawyer will know how to provide guidance on those issues.
You may not hear at all from your customer. They may be too overwhelmed with recent events to respond, or they may not have any answers, and not want to talk with you. Some customers might not even attempt to pay you. A lawsuit to get your collateral or to secure a court judgment might be the right step, if your other efforts are not working.
2. How should a lender or creditor prepare during this period of time with so much uncertainty?
Think about what you want to say to your borrowers or customers, and when to say it. Many of your borrowers and customers now financially struggling were probably good borrowers or customers before the pandemic. You should be prepared to receive calls from those who are asking for assistance. Assuming you want to maintain your relationship, you should determine what options you are willing to offer. For example, are you willing to defer payments and, if so, for how long? If you want to be more proactive, you may want to consider reaching out to your customers – even before they contact you to make any requests – to let them know you understand they may be facing adversity at this time, but you value your relationship and are willing to work with them.
Determine if you will distinguish between virus and non-virus related issues. COVID-19, without question, is causing economic hardships for many of your borrowers and customers. However, some may have been struggling well before the pandemic struck – and, chances are, COVID-19 will only make matters worse. Think about whether you are willing to work with those who may have been in pre-pandemic default of their obligations. If you are not willing to offer the same concessions to borrowers or customers who were struggling before the pandemic, then you may want to consider whether you want to or need to enforce your rights and remedies.
Decide how to document any new agreements you may enter into. If you enter into any agreements with your borrower or customer – for example, to defer payments for some period – you should think about how to document that agreement. An email may be sufficient in the simplest of cases, but make sure the new terms are clear. Insist on an acknowledgment from your customer that they agree to the new terms. Ask your lawyer if you need help with the agreement. Remember to state in your correspondence that nothing else in your contracts or agreements changes. For larger loans or accounts, or more complicated customer arrangements, you should consider talking to your lawyer about a more formal agreement, such as a loan modification agreement or a forbearance agreement.
3. Your borrower went out of business. Now what?
Even though your borrower or customer may have access to emergency federal loans or other funding, there will undoubtedly be some situations in which they simply close their doors and walk away from the business. No bankruptcy. No additional payments to you. What are your options?
As of the writing of this article, lenders may, with some notable exceptions discussed below, exercise traditional remedies to enforce their defaulting borrower’s obligations. Traditional remedies include: (A) liquidating collateral under applicable state law, including Article 9 of UCC, (B) filing a lawsuit against your borrower and/or borrower’s guarantor(s), if any, to obtain a judgment for any deficiency due to you, and/or (C) seeking the appointment of a receiver to salvage the value of your borrower’s business and continue it as a going concern (in limited scenarios).
Liquidating your collateral. If you have a security interest in all or some of your borrower’s assets, you may be able to quickly take possession of your collateral if (1) your borrower surrenders the collateral or (2) you know where your collateral is located, and taking possession does not constitute a breach of the peace. In the event your borrower will not surrender the collateral or the same is not legally accessible through self-help, then you may need to resort to filing a replevin lawsuit in court to obtain possession and, ultimately, the right to dispose of your collateral pursuant to the UCC.
Currently, courts in Nebraska and Iowa are still accepting newly filed replevin actions and scheduling hearings on requests for delivery of property (your collateral). A request for delivery of property is a “summary proceeding” which usually requires a hearing be held on the right to possession of collateral within seven to fourteen days. But, these hearings are becoming more difficult to schedule as courts move to telephonic or video hearings in lieu of in-person hearings during the pandemic. Some courts have stopped holding hearings altogether. Lenders and their attorneys should be aware of rapidly changing hearing dates and conducting hearings remotely, instead of in-person. Don’t be surprised if you’re faced with a continuance or two – and delayed possession of your collateral – along the way.
In the event your borrower’s loan is secured by a lien, mortgage, or deed of trust on real property, you may be unable to foreclosure that lien or mortgage or exercise the power of sale under a deed of trust due to certain moratoriums in place preventing such actions. For example, the Governor of Iowa issued a proclamation on March 22, 2020, imposing a moratorium on all residential, commercial, and agricultural foreclosures. Further, the CARES Act provides additional protections for borrowers with residential property connected to a federal loan program, including direct and guaranteed USDA loans. Lenders will want to stay up to date on the current and ever-changing protections that have been put in place to assist borrowers during the pandemic.
Filing a lawsuit. If the lender has liquidated its collateral, but its borrower still owes a deficiency, it may be time to file a lawsuit against the borrower and/or any guarantors. Courts in both Nebraska and Iowa continue to accept new cases, but an increasing number of these cases are on “pause” as in-person court appearances, including jury trials in some jurisdictions, have been continued indefinitely. Again, lenders and their attorneys need to be aware of the constantly changing legal landscape and impact COVID-19 has on the operation of the judicial system and progression of your case.
Appointing a receiver. In some situations, it may be advisable to seek the appointment of a receiver to take possession of your collateral and/or operate your borrower’s business if your borrower is unwilling or unable to continue business operations during the pandemic. If your borrower’s business is substantial or at high-risk of losing value in the event your borrower walks away, you may need to seek appointment of a receiver to take over the business in order to preserve as much value as possible.
Please reach out to any of our creditors’ rights attorneys should you have any questions.