Top retailers are filing bankruptcy in record numbers. Will your borrower?

December 17, 2018 by Alexa P. Stephenson, Esq.

Over fifteen major retail stores have filed for bankruptcy this year. Previous heavyweights, like Nine West, Toys R Us, Remington Outdoor, Brookstone, Sears, and David’s Bridal, are now closing a significant number of stores and seeking protection in the bankruptcy court to reorganize their debts in the hopes of staying afloat in the rapidly declining economy. 2018 marks the fourth year in a row that American businesses are filing bankruptcies in record-high numbers. This, coupled with the fact that former leaders of their respective industries – Starbucks, Lowes, Subway, H&R Block, and Gap – are collectively closing over 1,300 stores within the next year, points to the next economic downturn occurring in the near future.

It is no secret that filing bankruptcy is a tool in a borrower’s arsenal that borrowers do not hesitate to use to temporarily drag out or halt a foreclosure sale. A bankruptcy case has become an inevitable headache that non-conventional lenders will face between filing a Notice of Default and recording the trustee’s deed upon sale. While borrowers have a range of bankruptcy chapters to choose from, this year has seen an unprecedented increase in Chapter 11 filings, which require a more complex set of procedures for borrowers and creditors alike. As a result, secured lenders have dealt with a longer and more expensive time period before they can get paid in full.  

As the economy continues to decline and borrowers continue to take advantage of the protections of the bankruptcy court, what can non-conventional lenders do to protect their rights under the note and deed of trust? The best option may seem counterintuitive: talk to an attorney.  Why?  Talking to an attorney will cost an exorbitant amount of fees, right? A lender only needs to consult with an attorney once the borrower files a lawsuit or bankruptcy, right? Wrong.  

A good attorney can work with you from underwriting to foreclosure, and every point in between, to create a strategy specifically suited to your borrower to ensure you’re paid in full in the fastest and least expensive way possible.  Often times, consulting with an attorney early on will save you thousands of dollars and plenty of frustration in the future.  For example, running background checks on your borrower during underwriting can show whether this particular individual or entity has filed bankruptcy or other lawsuits in the past, and therefore, will be more likely to do the same to avoid repaying you.  In another case, if you’re certain your defaulting borrower will file a lawsuit against you, a forbearance agreement could be the best way to ensure a quick escape out of the inevitable — and expensive — superior court case. 

As real estate prices continue to stagnate and, in some places, decline, relying solely on the LTV is no longer an option. The next recession is coming. It’s only a matter of when.  Litigation mitigation is a necessary precaution for every lender who hopes to avoid bigger losses down the road.  Those who fail to remember the mistakes of the 2008 recession are doomed to repeat them.  

If you have questions about the best strategy for your borrower and to ensure you are paid in full on your loan, contact the Geraci Law Firm to work out a strategy now.