It can be both frustrating and bad for business when you lend money to an individual or another business and they default on their loan payments. Many lenders experience frustration and are fearful that a borrower who stops repaying a loan will never repay a loan. That is not always the case, however, and there are different ways that lenders can legally encourage borrowers to pay their debts.
First Steps: Invoices and Phone Calls
Most businesses send multiple invoices and make personal phone calls when a borrower stops making his loan payments on time. If a buyer had a temporary problem such as a short furlough from work or an illness then this approach may work and the problem may be solved. Unfortunately, this is only true for a small percentage of borrowers and often borrowers are not making regular payments on their loan because they simply do not have enough money to do so. In that case, multiple invoices and phone calls are not likely to be effective.
After the phone calls have been made and the invoices sent, it may be beneficial to consider a loan workout or modification. A loan workout is a modification to the original loan that is negotiated and agreed upon by both the lender and the borrower. It can include any terms agreed to by both parties such as a lower interest rate, a longer repayment period or forgiveness of part of the principal.
Litigation and Foreclosure
Sometimes the measures described above are not enough and lenders need to pursue more formal avenues of collecting on their defaulted loans. This often involves filing a lawsuit against the debtor to collect the money owed or taking part in the debtor’s bankruptcy proceedings to ensure that your loan is given the priority which it is due in the bankruptcy plan.
If you file a lawsuit against a debtor then the Court may order that the debtor repay his debt to you according to a specific timetable and using money from a particular source. For example, the Court could require the debtor to sell specific property and to pay his or her debt to you with those funds. Alternatively, the Court could require the debtor to use a certain amount of his weekly or monthly paycheck to repay the loan to you. If the loan document upon which you are collecting payment was well drafted then it likely contained a provision for attorney’s fees. That means that if you prevail in your lawsuit that the debtor will need to pay your attorney’s fees.
Usually the same attorney who represents you in your lawsuit against a debtor can help you protect your claims if the debtor files for bankruptcy. It is especially important that you have representation in a bankruptcy proceeding because once the bankruptcy is discharged you will likely no longer have any right to collect money against the debtor beyond what is included in the bankruptcy settlement agreement.
Sometimes creditors must go to Court to collect on a defaulted loan. If you have not been paid money that is owed to you then you should consult with a collections attorney in your state to discuss your options.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.