When Your Borrower Files Bankruptcy - A 10-Point Checklist

Previously published in the Special Assets Blog

This past quarter end once again reminded us that the economy remains weak and borrowers who have managed to hang on for the past three or four years are running out of staying power. The topic again arose - what to do when a borrower files bankruptcy? Faced with the prospect of throwing good money after bad, some lenders bury their head in the sand and simply wait it out, often with terrible results. Others charge ahead aggressively and run up large legal bills that are not justified by the amount of the obligation or the difficulty of recovery.

Over the years, I have encouraged clients facing a bankruptcy filing by a customer to stop and carefully consider the available options. Here is a simple checklist to run through while reaching a decision that will preserves the Bank's rights in a manner that is cost-effective.

1. Start with a clear understanding of the facts. Take a few minutes to collect the loan documents, payment history, appraisal, title report, UCC search and other critical information. Make sure you understand the basics about the loan and the relationship between the borrower and the Bank.

2. Talk to the relationship officer. Find out whether there were warning signs or special problems that affected the borrower's ability to repay the loan or other creditors.

3. Find out whether the Bank's loan was the cause of the bankruptcy filing. Many times, this is obvious, but often, a borrower files unexpectedly because of pressure from other creditors. It is crucial for a workout professional to understand those pressures and how they affect the borrower and its business.

4. Rule out lender liability claims. We've experienced a recent uptick in spurious lender liability claims. These are usually brought by a borrower who has both a loan in trouble and something to lose. If claims are asserted that the woes of the borrower were caused in any way by the Bank, it is crucial to identify and address those claims at the outset.

5. Determine whether the Bank's claim requires engagement of counsel. Not every bankruptcy filing means that the Bank should go to the expense of hiring counsel, but it is important to make that determination as soon as possible when a bankruptcy has been filed. Experienced bankruptcy counsel, such as the JMBM Special Assets Team, can work with lender clients to determine whether counsel is necessary, and if so, what level of representation is needed.

6. Send all loan...