Question about default on LLC loan

Contact your lawyer and accountant.

Contact your lawyer and accountant.

Best advice you will get on this board, though I would love to hear from the people in the lending business.

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?

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.

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(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." )

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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

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!

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

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.

Even during the Boom, when lenders had their doors wide open?

Beyond the legal questions are the moral ones:

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

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

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.

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.

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.

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)

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.

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.

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.


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Beyond the legal questions are the moral ones:

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

I agree. Evading our obligations seems to be the appropriate course.