Commercial Mortgage Foreclosure

If you're behind on your commercial building payments, your lender can declare a default and foreclose on your property.

When you took out your building loan, you gave your lender a mortgage (called a deed of trust in some states). This created a security interest in your property that gives the lender the right to start foreclosure proceedings to force a sale of your property if you fail to pay your loan according to terms.

The good news is that lenders don't like foreclosures because they're costly and difficult. The bad news is that lenders won't hesitate to foreclose on past due loans if they aren't given better options.

What To Do First

The chances are that your commercial building loan is only a part of bigger financial problems. Don't stick your head in the sand and wait for more bad news. Develop a game plan to deal with the situation immediately. Your options include:

• Reorganizing, consolidating or even eliminating debts through proceedings that may include bankruptcy
• Trying to work out a compromise with your lender
• Selling your building

Talk to a bankruptcy lawyer or someone who professionally counsels people with credit problems. You shouldn't have any trouble in setting up a free consultation.

A lawyer should explain available options to you at your first meeting. The lawyer should also explain how he or she would expect to be paid. Lawyers who specialize in these matters have ways to work out payment arrangements that their clients can afford.

Negotiating With Your Lender

Talk to your lender about a compromise, such as:

• Different payment terms (lower payments over a longer period of time)
• Forgiving some late payments now in exchange for a longer period of payment
• Lower payments in exchange for a higher interest rate over a longer payment period
• Refinancing at a lower interest rate (to make payments lower)

Lenders are not always willing to compromise. The best chance you may have to strike a compromise is to have a lawyer representing you in the negotiations.

Deeds In Lieu of Foreclosure

If you can't reach a compromise, consider offering to convey the property back to the lender voluntarily by a "deed in lieu of foreclosure" (sometimes called "deed in lieu of forfeiture").

A lender may be hesitant to accept a "deed in lieu" if state law provides a borrower with a right to redeem property for a certain period of time (e.g., up to a year later).

You'll definitely want a lawyer involved in negotiating the details with your lender.

A deed in lieu of foreclosure will still show up on your credit report, which could make it difficult to buy property in the future.

The Foreclosure Process

State laws vary greatly, but the foreclosure process generally involves:

• The lender giving you a written notice of default, which will likely come by certified mail
• Your being given a period of time after proper notice pay the lender the amount required to cure the default and to reinstate your loan
• The lender electing to proceed with foreclosure under available remedies, which may include:
  • Pursuing a judicial foreclosure by filing a lawsuit to obtain a court order to sell the property
  • Pursuing a non-judicial foreclosure by following procedures spelled out in your mortgage (or deed of trust) that allow a trustee to foreclose on and sell your property without a court order
• After the required time has elapsed, your being given a notice of foreclosure sale
• A public sale being held by auction where the highest bidder can buy your property
• If no one bids enough, the lender itself buying the property by submitting a credit bid based on the amount you own on your mortgage
• If the lender ends up with the property, it being sold by private sale at a later date
• If you have not vacated the property by the time of the foreclosure sale, an unlawful detainer lawsuit being filed to evict you

At any point during these proceedings, you are usually in the position to keep your property if you pay off the loan and pay for foreclosure costs.

You may have defenses that you can assert. You can also stop a foreclosure temporarily by filing bankruptcy, which imposes an automatic stay that prevents a lender from proceeding forward without permission from the bankruptcy court. However, you have to be realistic in assessing your options since the laws in all states give lenders many rights when it comes to protecting their security interests.