Question about default on LLC loan

Discussion in 'Real Estate' started by beachdoc1, Aug 9, 2007.

  1. beachdoc1

    beachdoc1 Beach Comber

    Joined:
    Apr 6, 2007
    Messages:
    6
    Likes Received:
    0
    My wife and I own a sizable rental property in the Destin area--however the carrying costs have gotten enormous..to the point that we'll either have to fire sale the property soon and take a huge loss, or default on the loan.

    We established an LLC when we purchased the property, and the property is deeded to the LLC, the LLC has a sizeable loan to a national bank. If our LLC decides to default on the loan from our bank for this property what are the ramifications? Could this injury our personal credit too?

    Thanks for any input.

    Desperate Destin Property Owners:sosad:
     
  2. SHELLY

    SHELLY SoWal Insider

    Joined:
    Jun 13, 2005
    Messages:
    5,775
    Likes Received:
    802
    Contact your lawyer and accountant.
     
  3. Smiling JOe

    Smiling JOe SoWal Expert

    Joined:
    Nov 18, 2004
    Messages:
    31,648
    Likes Received:
    1,771
    :clap:Best advice you will get on this board, though I would love to hear from the people in the lending business. :idontno:
     
  4. Beachbummett

    Beachbummett SoWal Insider

    Joined:
    Jul 16, 2005
    Messages:
    5,748
    Likes Received:
    207
    Location:
    Birmingham and Watersound
    An LLC is held under your social security number, so I am pretty sure it will go against your credit. Shelly gave you good advice, contact your attorney or accountant. Why don't you consider selling it at a fire sale price and getting out from under it without ruining your credit?
     
  5. SHELLY

    SHELLY SoWal Insider

    Joined:
    Jun 13, 2005
    Messages:
    5,775
    Likes Received:
    802
    Found this on the web:

    What happens with the mortgage that I am personally liable for?

    It depends in large part on the lender holding the mortgage and the relationships with that bank. A lender may allow the LLC to assume the loan and mortgage, either with or without changes to the terms of the loan. Alternatively, a lender may require that the LLC obtain a new mortgage in the name of the LLC, and that the personal mortgage be repaid with the proceeds of that new mortgage. In either case, because the loan is being made to an entity and not to a private individual, the lender may request that the member(s) of the LLC provide a personal guarantee or additional collateral. The exact terms, conditions and loan options will vary depending on the lender and other circumstances.

    Whether the LLC is permitted to assume the personal loan or the lender grants a new loan to the LLC, the bank will likely require that the deed to the property be transferred to the LLC and that the property be pledged as collateral for the loan.

    -----------------------------------------------

    (Before you make the decision to default on your loan, you must have reputable lawyer go over the LLC document--especially if you formed an LLC through one of those ads like "Florida LLCs for $99." )

    .
     
    Last edited: Aug 9, 2007
  6. Capricious

    Capricious Beach Fanatic

    Joined:
    Jul 11, 2005
    Messages:
    422
    Likes Received:
    21
    Having borrowed money only once in my 48 years I have
    little experience with debt, but my understanding was
    that most banks would not loan to closely held corps etc.
    without a personal guarantee on the note.

    If you personally guaranteed the note, you are on the hook.

    Yes you need to consult an attorney and fast
     
  7. Skerm

    Skerm Beach Comber

    Joined:
    Sep 11, 2005
    Messages:
    21
    Likes Received:
    0
    Location:
    Chicago
    LLC stands for Limited Liability Company....It is set up very similar to a corporation in that a liability does not extend to any single person beyond the corporate entity itself (unless the corporate veil is pierced due to proper corporate filings or procedures not being followed).

    However, no bank in their right mind would lend to an LLC without requiring PG's (personal gurantees).

    You are on the hook, do not consider defaulting unless you have no other option!
     
  8. Mango

    Mango SoWal Insider

    Joined:
    Apr 7, 2006
    Messages:
    9,714
    Likes Received:
    1,360
    Location:
    New York/ Santa Rosa Beach
    This is correct. Most if not all Banks will not lend to an LLC, and if they did, it was personally guaranteed by the Borrower(s).

    Try the fire sale if you can to preserve your credit and don't forget to consult an attorney.
     
  9. Smiling JOe

    Smiling JOe SoWal Expert

    Joined:
    Nov 18, 2004
    Messages:
    31,648
    Likes Received:
    1,771
    Even during the Boom, when lenders had their doors wide open?
     
  10. Capricious

    Capricious Beach Fanatic

    Joined:
    Jul 11, 2005
    Messages:
    422
    Likes Received:
    21
    Beyond the legal questions are the moral ones:

    Do we take responsibility for our actions or do we look
    to evade our obligations?
     
  11. hutch

    hutch Beach Lover

    Joined:
    Feb 19, 2005
    Messages:
    189
    Likes Received:
    1
    Location:
    On the Bay Walton County, Lake Burton
    Great answers by all members. No bank is going to loan money to a LLC without a personal guarantee signed by it member(s). If you default on the loan most likely it is going to be reported to the credit bureaus in your name and will remain on your file for 7 years. Ouch!

    If you need a local attorney call Bruce Partington of Clark, Partington, Hart, Larry, Bond & Stackhouse at 850-434-9200. Bruce is located in Pensacola, but they do have a local office in Destin. He is one of the best! Not Cheap, but worth every penny. Tell him the hutch sent you.

    the hutch
     
  12. 6thGen

    6thGen Beach Fanatic

    Joined:
    Aug 22, 2005
    Messages:
    1,491
    Likes Received:
    152
    The question looks to be will you take the loss or will the bank take the loss. To answer your question, you will take the loss. Since you establised an LLC when you purchased the property, I'd assume it's a single asset entity or at least was one at closing. Therefore it is unable to stand on it's own to repay and you would have guaranteed the debt. It's a long process in Florida, but eventually if there was a deficiency on the foreclosure, the bank would pursue you and anyone who signed a guarantee for said deficiency, plus attorney fees, late charges, interest accrued, and interest accrued at the default rate, as high as 25% in Florida. You probably signed an unlimited guarantee, so they can come after each guarantor for the full deficiency, not their percentage owned. The best thing you can do is to stay in touch with the bank. They'd be much more willing to work with you if you contact them and explain the situation rather than your attorney. The bank took a risk on you, and your ability to repay the debt. They gave you an incentive to repay the debt by taking property as collateral should you not. If the property isn't worth what it was at closing, they still depend on you to repay. Even if you closed it in an LLC. Take the advice of those on the board and talk to an accountant and an attorney, but you need to talk to the bank as well. If your attorney contacts them, it's a hostile sign and they know it's time to return the hostility. There are a lot of folks in the area who've gotten bad advice from attorneys that are inexperienced in this area.
     
    Last edited: Aug 10, 2007
  13. spinDrAtl

    spinDrAtl Beach Fanatic

    Joined:
    Jul 11, 2005
    Messages:
    368
    Likes Received:
    2
    Most lenders will not even lend to an LLC for this type of purchase unless all members can qualify individually and also individually guarantee the entire loan. Many times what you will see is a loan taken out in one person's name or as co-borrowers and then the property is deeded into the LLC after closing. In that case obviously the individuals that took out the loan are responsible.

    Lenders typically do not care that they are receiving monthly payments from the LLC as opposed to the person(s) that is on the loan as long as the payments are coming in.
     
  14. Smiling JOe

    Smiling JOe SoWal Expert

    Joined:
    Nov 18, 2004
    Messages:
    31,648
    Likes Received:
    1,771
    6thGen,
    Clark Howard gives similar advice regarding talking personally to the bank. He notes that most people avoid talking to the bank, but that is the best way to work through the situation. The banks just want their money promised, not to take a collection of inventory of real estate. Many banks will work with the customer to work out something so that your credit is not ruined, your promise to repay is not broken, and that you can have some sense of a good mind and ethics/morality.

    I would agree that talking to an account/lawyer is vital, but remember that lawyers can be too firm sometimes, and may have a different agenda.
     
  15. Smiling JOe

    Smiling JOe SoWal Expert

    Joined:
    Nov 18, 2004
    Messages:
    31,648
    Likes Received:
    1,771
    6th Gen, you insinuate that if the LLC has other assets/income, that things could might be different. If the LLC wasn't a one time purchase/holding, and had income and assets, but didn't have enough to sell off and pay off the full debt owed, would the individual still be personally responsible for the debt, or would it stop with the LLC?

    (just curious to learn)
     
  16. Mango

    Mango SoWal Insider

    Joined:
    Apr 7, 2006
    Messages:
    9,714
    Likes Received:
    1,360
    Location:
    New York/ Santa Rosa Beach
    True dat. However, I've seen cases where a lender will not talk to anyone until the loan is delinquent or even in the REO dept. depending on the state laws.
    But yes, I have seen Banks take the mortgage payments for a certain time period and add them to the back of the loan to give a breather.

    I have also seen all different kind of lawyers on all different transactions be too aggressive or passive. It's important to get all the facts regarding your legal rights, then make a decision on how to proceed.
     
  17. SHELLY

    SHELLY SoWal Insider

    Joined:
    Jun 13, 2005
    Messages:
    5,775
    Likes Received:
    802
    Working with the bank is the way to go....unfortunately many of the mortgages aren't held by the bank (many banks just service the mortgage). Mortgages have been sliced and diced and sent out to various entities around the world. That being the case, the servicing bank may be more than happy to assist with a new loan--but if the appraisal falls short of the amount owed or the buyer doesn't qualify, things get a little more complicated.


    .
     
  18. elgordoboy

    elgordoboy Beach Fanatic

    Joined:
    Feb 9, 2007
    Messages:
    2,283
    Likes Received:
    366
    Location:
    I no longer stay in Dune Allen
    I agree. Evading our obligations seems to be the appropriate course.
     

Share This Page