(More on the Collection Plate collection, which focuses on the recovery side of our work – the bottom line, nitty-gritty, work of getting "back" the money.)
Our economic eddy is at the stage where law suits against guarantors or indemnitors, on full payment and performance agreements or on "bad-boy" agreements, are reaching final judgment – or better yet (for the lender), summary judgment.
This means that the lender can now attempt to seize property owned by the guarantor or indemnitor. (Download our glossary of workout and bankruptcy terms.)
Holding a judgment in your hand (ok, after printing the electronic version of the Court Order) does not mean, however, that you can walk down the street to the guarantor’s bank, go to the teller counter and . . . presto . . . here comes the money. Indeed, the reality often is –
Collecting a judgment can be very, very difficult.
It takes me back to the "lessons" learned list. (And possible answers to this question: "How might we avoid this train wreck in the future? . . . Or at least "improve" the situation. . . . OK, how about at least know that the "no money" train is around the bend and about to hit us ?)
Here are a few possible additions to your underwriting process and loan document boilerplate:
- The Guarantor should be US based (if an entity), or a US citizen
- Add a covenant addressing no change in this and periodic verification
- Assets shown on the Guarantor’s balance sheet should be located in the US, and not capable of being moved off-shore (the assets should be real estate, securities traded on an US exchange, etc.)
- Add a covenant addressing no change to this and periodic verification
- Contingent liabilities should be listed on the Guarantor’s balance sheet (such as other guaranty or indemnity agreements)
- Continuing net worth and liquidity covenants should be considered
- If applicable, don’t overlook issues relating to the marital status of the Guarantor
- Make a violation of these provisions an express event of default, and a "bad boy" event triggering full liability for the loan (and collection costs)
And don’t forget this basic special servicing approach:
- Act fast; be the first lender out of the gate – the "last" lender to act typically comes in last
If you have other tips to add to the list, please comment below.