Creditor Workouts With Secured Lenders

Creditor workouts with Secured Lenders

I am often retained by clients for the purpose of negotiating settlements with their major creditors in an effort to avoid their having to file for Bankruptcy protection. Usually, I am retained to negotiate settlements with clients’ major unsecured creditors. Although it is less frequent, over the years I’ve also been retained to negotiate settlements with clients’ secured creditors; usually this is an undersecured or completely unsecured 2nd mortgagee having little or no equity available in our clients’ home or other collateral. E.g., when the balance owed on the first mortgage is more than the fair market value (“FMV”) of the clients’ home then any 2nd or subsequent lien holder would be completely unsecured.

Historically when being retained to negotiate settlements with our clients’ unsecured creditors, I’m usually able to reach a settlement requiring our clients to pay anywhere from approximately 25% to 50% of their total debt depending on a variety of factors. Settlement terms may require one lump sum payment or enable clients to submit monthly installment payments over time (see other article in this website entitled “Creditor Workouts”). The lower the percentage of the total amount of the original debt the creditor is willing to accept, the more likely is that the creditor will acquire the client to relatively promptly submit one lump sum payment. Often times, it makes more sense for our clients to just file for bankruptcy protection rather than be required to pay much more than 50% of the amount due to their major unsecured creditors, assuming they even have the ability to pay back a significant percentage of their unsecured debt.

Case outcome updates

Since the onset of the COVID-19 epidemic, I have been retained by several clients, who either own and/or operate small businesses, to attempt to negotiate settlements with their small businesses’ major secured creditor. My negotiations with these secured creditors have, almost universally, been both surprisingly easier and yielded better results than with our clients’ unsecured creditors during the same time period. I find that most secured creditors are willing to forgive most of, if not the entire, balance owed, as long as our clients act in good faith to protect and, if required, return the collateral securing their loans. Perhaps the COVID-19 crisis has something to do with this, but I’ve noticed that since the onset of the COVID-19 epidemic, I have seen no such willingness from our clients’ unsecured creditors and/or their attorneys to quickly forgive large percentage of our clients’ unsecured debt balances.

Taxi medallion loans

Nowhere has this been more evident than with several of our clients who have retained my services to negotiate settlements of their Taxi Medallion loans which usually have balances in the low to upper six (6) figures. All of these loans were significantly in arrears when I’ve been retained. In order to legally operate a taxi in New York City, Newark New Jersey, New York metropolitan area airports, and probably many other locations, the owner of the taxi must have a valid license issued by the governing municipal authority, known as a taxi medallion. These medallions can be very expensive and probably more often than not the owners take out what is known as a Taxi Medallion loan, the proceeds of which are used to purchase the Medallion.

The taxi business has been hit hard during the COVID 19 epidemic and I have found that as long as the owner is willing to turn over the medallion and cooperate in good faith with his secured lender, the lender has been willing to forgive all or a substantial majority of the outstanding deficiency balance. There has almost always been a significant loan deficiency balance in every one of these cases for which I have been retained; the deficiency balance represents the entire loan balance owed by the debtor/our client, less the amount the secured lender is able to receive from its sale of its collateral/the FMV of the collateral (i.e., in all cases in which we have been retained, the fair market values (“FMV”) of the medallions are significantly less than the loan balances).

So far, secured taxi medallion lenders have universally been willing to accept the return of the collateral/the medallions without requiring our clients to turn over most, and sometimes any, of their savings to satisfy the deficiency balances. The same has not held true with most of our negotiations with our clients’ unsecured creditors during the same time period.

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