Foreclosure refers to a process in which a financial institution attempts to repossess a business asset such as a car or commercial vehicle or business premise, which is mortgaged to it by the business. Foreclosure happens because the business stops repaying its loans. Loans given to a business are typically secured by an asset. When a business cannot make its loan repayments, the lender steps in and takes possession of the pledged asset. The asset is then sold and the proceeds are utilized for repaying the loan. Business foreclosure laws work just like personal foreclosure rules and are overseen by the state.
Business foreclosure laws require the lender to send a notice to the defaulting borrower. The notice must give the borrower adequate time to pay up the loan – this period is referred to as the redemption period and is usually prescribed by state laws. The lender must communicate the exact amount that is due (including penalty, interest, principal, etc.). If the defaulting borrower does not repay the loan within the redemption period, then his property can be foreclosed.
After foreclosure, the asset is sold. The lender must note that the first right on the asset belongs to the primary lien holder (in case the foreclosing lender is not the primary lien holder). The primary lien holder is paid off first, and the remaining balance goes to the foreclosing lender. If any balance remains after paying off all lien holders, then that balance must be handed over to the defaulting borrower.
A business foreclosure is typically overseen by the court, which monitors the sale of the asset. However, some American states allow lenders (mortgage holders) to sell the asset without any supervision from the court. When the court oversees the foreclosure, it is referred to as a judicial foreclosure, and when it does not, it is referred to as foreclosure by power of sale. In some cases, the lender may just repossess the property without foreclosing it – in such cases, the repossession is referred to as deed in lieu of foreclosure.
Business foreclosures happen all the time and it is not necessary that a business has to file for bankruptcy. If a business has pledged an asset against a loan, and cannot keep up with the repayments, then the lender has every right to foreclose the asset. However, if a business has filed for Chapter 11 bankruptcy, then the foreclosure is stopped until the reorganization plan comes into force. In Chapter 7 bankruptcy, the asset is sold by a court-appointed trustee, who sells the assets and distributes the proceeds.
If a stakeholder has mortgaged his property or given a personal guarantee for a business loan for a corporation of a partnership firm, then the stakeholder’s personal assets can be foreclosed or brought under the bankruptcy process even though the law states that a business is separate from the owner.
These were the facts about business foreclosure laws. If you are facing a foreclosure, then you must consult a legal professional because business foreclosure laws are quite complicated.
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