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I’ll just apologize in advance for the long explanation and background information. I just that to get any accurate advice, the situation that I’m in needs to be clear. With that in mind I’ll get to the point. Back in February of 2007 I purchased a commercial building for a business owned by myself and two others. The plan was that I would own the building since they couldn’t afford to put any money down, and the business would lease the building from me.
While applying for the loan, I told the bank rep that I wanted to make sure that the building loan would not be on my personal credit. He suggested that we go ahead and close the loan and once it had closed all I needed to do was set up an LLC, do a quit claim deed, and then the bank would transfer the ownership (on their books) over to the new LLC that I had set up. We went ahead and closed on the property, I set up the new LLC that would “own” the building and lease it to my original company, did the quit claim deed to the new LLC, and gave the bank the information.
In December of 2008, I decided to get out of the business partnership I was in for fear that with our downsizing I would be in danger of losing the building due to the cost of having three owners. My two former partners agreed to continue to lease the building on a month to month basis as long as they could.
Last summer (2009) I went to get a loan for a new truck and was surprised to find out that I was declined for a loan. I checked my credit report and found out that the bank had started reporting the commercial building loan on my personal credit. I contacted the bank (it’s a small bank that underwrites their own loans), but the person that had done my loan was no longer with the bank. I explained that the building shouldn’t be reporting on my personal credit and explained the above to them. I was told that it would be fixed and that the loan would stop reporting on my credit. Well, three months later I was notified that the bank was in receivership with the FDIC. I set up an appointment to talk with someone from the FDIC . In that meeting they basically told me that the only way the loan was going to get out of my name and into the LLC’s was if I refinanced, and there was nothing else they could do.
So here is the problem I’m facing. My old partners have informed me that it’s likely they won’t be leasing the building past this fall. If they leave I’ll be stuck with a $450K loan and a $4,300 dollar payment that I can’t afford. Not to mention a tax bill that exceeds $500/mon. It looks inevitable at this point that I’m going to lose the building. The values have dropped and continue to do so, and leasing to someone else wouldn’t cover the mortgage.
With that in mind I have considered ceasing to make the payment on the building immediately. I’d continue to collect the lease payment as long as my old business partners can pay, and just let the building go into foreclosure.
This brings up another question. If my credit is going to be ruined by all of this, I’m wondering if it would be in my best interest to stop making payments on my house, my HELOC, and another loan that I got for a dirt lot. My home value is at about par with my loan amount at this point, however, with the HELOC that I got to help pay for the 20% down payment on the building, it’s way under water. The land is worthless at this point but I have paid it out of principle for almost five years now, all interest.
So my thinking is I leave it all. Since my credit is going to be ruined, I quit making payments on all of the loans and save as much money as I can before I’m forced out. If you’ve read this far, thank you! Any thoughts??
Last edited by Green Irish Eyes; 05-26-2010 at 07:55 PM..
Reason: Added spacing to make it readable.
You do realize it is IMPOSSIBLE for a building loan to not be in your personal credit file... I mean what bank would be stupid enough to do that? If you stop making payments on your house, they will foreclose... if you stop making payments to your HELOC, they can still come after you for the money and go to court... if you stop making payment to the land loan, they take the land..
If I was you, I will be careful... your assets are ALL fair game (except retirement, etc)... meaning they can literally come and take the shirt off your back if they sell those properties for less than they gave to you... so if you have assets, you are SOL... If I were you, I try to unload the land, short sale the house, and try to pay the HELOC to keep them from hounding you... Bottom line, don't feel bad for the banks they deserve it for making a loan to a person like you... you might as well and start getting a lawyer for bankruptcy..
I appreciate the time you took to write your response, but I'm not sure there was anything in your reply that was useful. To be honest, I don't feel bad for the banks that gave loans to a "person like me". I'm sure as you sat there and wrote you response you felt a sense of superiority and elitism. That's fine. I hope that difficult times don't put you in the situation that I'm faced with now. I came from no money and made high six figures at the age of 23 with no help from anyone. I didn't buy toys, expensive clothes, build a big house, or take vacations. I worked long hours and tried to get ahead while everyone else played, but unfortunately for me the economy in AZ tanked and I'm trying to do the best I can with it. I'm not trying to toot my horn and tell everyone how "good" I am. I just want it to be clear that I'm not the type of person that was buying sand rails, toy haulers, big houses, etc. with the money I was making. I'm also not trying to cry and complain about my situation, just simply looking for some useful advice from someone who knows what they're talking about. So if you're not one of those people then please keep your worthless judgmental responses to yourself. You can go flaunt your superiority to your friends and family. I'm sure they love hearing it from you.
To respond specifically to your post, if the building is owned by a corporation, even if the corporation is one individual, that individual is protected in the event of the corporation failing. That is true of course if the corporation was not set up for the sole purpose of defrauding creditors. That's the whole purpose of setting up a corporation (besides the tax advantages), to protect the owners and their personal property. And had the bank titled the loan accurately in the first place, the building could go into foreclosure as the corporation failed, but it would not effect me personally, along with my personal credit. In the event of that happening, I would have continued paying for my worthless assets, ie. my home, HELOC, and land simply because I made the agreement to do so. But if my credit is going to be wiped out due to me losing the building, I have to start looking out for myself at some point.
I appreciate the time you took to write your response, but I'm not sure there was anything in your reply that was useful. To be honest, I don't feel bad for the banks that gave loans to a "person like me". I'm sure as you sat there and wrote you response you felt a sense of superiority and elitism. That's fine. I hope that difficult times don't put you in the situation that I'm faced with now. I came from no money and made high six figures at the age of 23 with no help from anyone. I didn't buy toys, expensive clothes, build a big house, or take vacations. I worked long hours and tried to get ahead while everyone else played, but unfortunately for me the economy in AZ tanked and I'm trying to do the best I can with it. I'm not trying to toot my horn and tell everyone how "good" I am. I just want it to be clear that I'm not the type of person that was buying sand rails, toy haulers, big houses, etc. with the money I was making. I'm also not trying to cry and complain about my situation, just simply looking for some useful advice from someone who knows what they're talking about. So if you're not one of those people then please keep your worthless judgmental responses to yourself. You can go flaunt your superiority to your friends and family. I'm sure they love hearing it from you.
To respond specifically to your post, if the building is owned by a corporation, even if the corporation is one individual, that individual is protected in the event of the corporation failing. That is true of course if the corporation was not set up for the sole purpose of defrauding creditors. That's the whole purpose of setting up a corporation (besides the tax advantages), to protect the owners and their personal property. And had the bank titled the loan accurately in the first place, the building could go into foreclosure as the corporation failed, but it would not effect me personally, along with my personal credit. In the event of that happening, I would have continued paying for my worthless assets, ie. my home, HELOC, and land simply because I made the agreement to do so. But if my credit is going to be wiped out due to me losing the building, I have to start looking out for myself at some point.
The real purpose to form a corporation with a building/property is to protect oneself from lawsuites from OUTSIDE people. That means if workers/visitors get injured on your commercial property, and want to sue you. They sue the corporation and not you personally.
You are considered a small business, not a large corporate entity. No bank in their right mind will lend credit to your corporation only and not have you back up the loan against your personal credit.
I own a small business myself (it's an LLC but I elect S corp status). Every lease I've made, they take my business TIN and my personal SSN. I am personally liable for leases broken/expenses. That means they will go after my assets personally. However, if someone were to be injured in my place of business, I am protected from personal lawsuits because they would sue my corporation, which I can declare bankruptcy if needed.
But leasing/buying commercial property is completely as a small business is completely different than a bigger corporation. I believe they most banks set the limit as 5-10 million in assets before they will personally lend to the corporation based on their assets vs. a small business owner who must back up the loans with their own personal assets.
I think aneftp experience parallels my own. I too owned real estate for investment purposes and my tax advisor as well as my own personal lawyer and the banker(s) that I worked to finance those properties all reported the status of those loans as my personal responsibility. The legal principle for the Limited Liability Company is both to isolate the business venture from judgements (which could include both tradiotional loans as well as legal claims) AND to create a very flexible tax structure. An LLC is NOT a true corporation and DOES NOT have the unique rights / powers (or strict tax rules) that go along with a formally incorporated business. The lender representative that communicated that kind of isolation to you was flat out wrong...
I never had any non-related partners but I understand that if I would have it would have made the likelihood of traditional lenders getting involved MUCH more difficult as the standard for traditional banks is to only lend as a percentage of total assets. The standards for non-related parties securing loans are quite different than the rules with govern sole proprietorships / related parties -- basically if my wife and I borrow we are both 100% responsible for the debt. Lenders require a detailed partnership agreement and would never agree to any structure that leaves any part of the debt un-assignable...
I do understand that there are / were numerous banks and financial firms that deviated from those standards and borrowers that set up LLCs with the specific intent of isolating their business ventures from personal liability for debts, however the large number of defaults is a direct result of these misguided efforts to pump ever greater loan volume through systems that were not equipped to assess the true risk. In Illinois our candidate for the Senate, Alexi Giannoullias, was involved in a bank that largely failed due to this kind of nonsense: Alexi Giannoulias - Wikipedia, the free encyclopedia I think this relevant because NOW anyone that had such a loan from the Broadway Bank would be in the same pickle as you -- the FDIC transfers deposits like CDs, checking accounts and savings to a healthy institution and attempts to maintain the status of loans as well. Theoretically the FDIC, as receiver, could direct some activities, but more likely the acquiring institution will have no compensation available to it for loans that are non-performing... The legal terms of YOUR LOAN are still in force. http://www.fdic.gov/bank/individual/.../broadway.html The FDIC does make SOME minor provisions for folks that are close to getting behind on the their loans to work out better terms, but the thrust of their efforts seem to get you to find another lender -- my gut says that they are probably so swamped with easy-to-feel-sorry-for residential borrowers that they have little staff to deal with more complicated commercial loans, especially ones that are VERY small in the grand scheme of things. That said I suspect there are lawyers out there that MIGHT be able to help you navigate your way to a good solution IF you do everything right from here on out. I think part of doing things right is to do everything you can to line up the right kind of lawyer ASAP AND follow the rules the FDIC has for borrowers in distress: http://www.fdic.gov/bank/individual/...ers/index.html
My suggestion is that you forget anything about what the prior bank management suggested they'd do and instead think about what truly makes sense for you and your future situation. The best starting place is almost certainly a skilled and wise attorney. Ideally you would have consulted them before you got into this situation, but I suspect that there may still be some maneuvers open to you to keep this thing from pulling you under...
With out knowing what you would hope to accomplish in a bankruptcy I can only say that you need to consider the likely loss of what sounds like is a pretty signficant pile of solid assets AS WELL as a stain that will make it much more difficult for you to get credit for personal OR BUSINESS purposes for quite some time...
Ideally the lawyer you select to represent you will have experience in working out solutions that involve business dealings and not just by-the-numbers personal bankruptcy.
Good Luck!
Last edited by chet everett; 05-27-2010 at 12:30 PM..
I appreciate the time you took to write your response, but I'm not sure there was anything in your reply that was useful. To be honest, I don't feel bad for the banks that gave loans to a "person like me". I'm sure as you sat there and wrote you response you felt a sense of superiority and elitism. That's fine. I hope that difficult times don't put you in the situation that I'm faced with now. I came from no money and made high six figures at the age of 23 with no help from anyone. I didn't buy toys, expensive clothes, build a big house, or take vacations. I worked long hours and tried to get ahead while everyone else played, but unfortunately for me the economy in AZ tanked and I'm trying to do the best I can with it. I'm not trying to toot my horn and tell everyone how "good" I am. I just want it to be clear that I'm not the type of person that was buying sand rails, toy haulers, big houses, etc. with the money I was making. I'm also not trying to cry and complain about my situation, just simply looking for some useful advice from someone who knows what they're talking about. So if you're not one of those people then please keep your worthless judgmental responses to yourself. You can go flaunt your superiority to your friends and family. I'm sure they love hearing it from you.
To respond specifically to your post, if the building is owned by a corporation, even if the corporation is one individual, that individual is protected in the event of the corporation failing. That is true of course if the corporation was not set up for the sole purpose of defrauding creditors. That's the whole purpose of setting up a corporation (besides the tax advantages), to protect the owners and their personal property. And had the bank titled the loan accurately in the first place, the building could go into foreclosure as the corporation failed, but it would not effect me personally, along with my personal credit. In the event of that happening, I would have continued paying for my worthless assets, ie. my home, HELOC, and land simply because I made the agreement to do so. But if my credit is going to be wiped out due to me losing the building, I have to start looking out for myself at some point.
One of the problems is that you quit claimed the ownership to the LLC but YOU took out the original loan and that was NOT transferred to the LLC. That leaves YOU personally on the hook for the loan. The LLC does not really enter into it. Transferring the deed does not = transfer of the loan. This is probably why they are telling you that you would have to refi to get the actual loan changed over to the LLC.
I’ll just apologize in advance for the long explanation and background information. I just that to get any accurate advice, the situation that I’m in needs to be clear. With that in mind I’ll get to the point. Back in February of 2007 I purchased a commercial building for a business owned by myself and two others. The plan was that I would own the building since they couldn’t afford to put any money down, and the business would lease the building from me.
While applying for the loan, I told the bank rep that I wanted to make sure that the building loan would not be on my personal credit. He suggested that we go ahead and close the loan and once it had closed all I needed to do was set up an LLC, do a quit claim deed, and then the bank would transfer the ownership (on their books) over to the new LLC that I had set up. We went ahead and closed on the property, I set up the new LLC that would “own” the building and lease it to my original company, did the quit claim deed to the new LLC, and gave the bank the information.
In December of 2008, I decided to get out of the business partnership I was in for fear that with our downsizing I would be in danger of losing the building due to the cost of having three owners. My two former partners agreed to continue to lease the building on a month to month basis as long as they could.
Last summer (2009) I went to get a loan for a new truck and was surprised to find out that I was declined for a loan. I checked my credit report and found out that the bank had started reporting the commercial building loan on my personal credit. I contacted the bank (it’s a small bank that underwrites their own loans), but the person that had done my loan was no longer with the bank. I explained that the building shouldn’t be reporting on my personal credit and explained the above to them. I was told that it would be fixed and that the loan would stop reporting on my credit. Well, three months later I was notified that the bank was in receivership with the FDIC. I set up an appointment to talk with someone from the FDIC . In that meeting they basically told me that the only way the loan was going to get out of my name and into the LLC’s was if I refinanced, and there was nothing else they could do.
So here is the problem I’m facing. My old partners have informed me that it’s likely they won’t be leasing the building past this fall. If they leave I’ll be stuck with a $450K loan and a $4,300 dollar payment that I can’t afford. Not to mention a tax bill that exceeds $500/mon. It looks inevitable at this point that I’m going to lose the building. The values have dropped and continue to do so, and leasing to someone else wouldn’t cover the mortgage.
With that in mind I have considered ceasing to make the payment on the building immediately. I’d continue to collect the lease payment as long as my old business partners can pay, and just let the building go into foreclosure.
This brings up another question. If my credit is going to be ruined by all of this, I’m wondering if it would be in my best interest to stop making payments on my house, my HELOC, and another loan that I got for a dirt lot. My home value is at about par with my loan amount at this point, however, with the HELOC that I got to help pay for the 20% down payment on the building, it’s way under water. The land is worthless at this point but I have paid it out of principle for almost five years now, all interest.
So my thinking is I leave it all. Since my credit is going to be ruined, I quit making payments on all of the loans and save as much money as I can before I’m forced out. If you’ve read this far, thank you! Any thoughts??
The bank rep was wrong, and probably a primary reason why the FDIC had to come into the picture. When you signed the note and deed of trust (or whatever legal instruments your state uses), you signed as personal guarantor, a promise to personally pay. Just because you transferred title over to an LLC does not relieve you of any notes you signed personally before the LLC was created. That could have only been done in a refinance. Now, the LLC has title to the building, but you personally owe the money. FWIW, even if you had purchased the property as a corporation, you still would have had to sign as personal guarantor as the corporation did not have an earnings track record.
You are left holding the bag.......and as much as evilnewbies comments upset you, he or she is correct, they (all of the banks) can file for a garnishment, as well as, issue a 1099 on any business debt that is written off, putting you in the position of being beholden to Uncle Sam. They can go after your bank accounts and garnish your paycheck (which pushes most into BK). Since the HELOC was part of the commercial transaction and is considered a "cash out", it is not covered by the Mortgage Debt Relief Act of 2009.
This is not intended to be legal advice, which I surely hope you have obtained by now.
The bank rep was wrong, and probably a primary reason why the FDIC had to come into the picture. When you signed the note and deed of trust (or whatever legal instruments your state uses), you signed as personal guarantor, a promise to personally pay. Just because you transferred title over to an LLC does not relieve you of any notes you signed personally before the LLC was created. That could have only been done in a refinance. Now, the LLC has title to the building, but you personally owe the money. FWIW, even if you had purchased the property as a corporation, you still would have had to sign as personal guarantor as the corporation did not have an earnings track record.
You are left holding the bag.......and as much as evilnewbies comments upset you, he or she is correct, they (all of the banks) can file for a garnishment, as well as, issue a 1099 on any business debt that is written off, putting you in the position of being beholden to Uncle Sam. They can go after your bank accounts and garnish your paycheck (which pushes most into BK). Since the HELOC was part of the commercial transaction and is considered a "cash out", it is not covered by the Mortgage Debt Relief Act of 2009.
This is not intended to be legal advice, which I surely hope you have obtained by now.
This is how we see it here in Texas too.....we have clients with LLC's who hold title to real property, where there is a small local bank holding the loan. The LLC has title to the property, and might be mentioned on the loan documents as well, however, there is always an individual personal guarantor.
I suspect, even if you had refinanced the loan into the name of the LLC, the bank likely would have only approved that refinance, had you again been named as the personal guarantor on that loan.
Good luck - I second the suggestion you seek legal advice on your bigger picture question regarding your financial situation.
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