We are frequently asked about the effect of a bankruptcy either by the principle party or the business upon a new commercial loan transaction. Several years ago if I were asked this question I would have respond differently, however due to the paranoid state of the credit markets, things have changed.
Previously if an individual or business had just come out of a state of bankruptcy creditors were more prone to begin trusting that the individual has gotten themselves back to a stable situation. In some industries, such as the airline industries, it was commonplace to file bankruptcy in an effort to become more competitive than the competitor. These sorts of headlines no longer make the news as this tactic no longer works.
Bankruptcy laws have changed to such an extent that they have rendered previous underwriting guidelines obsolete. Today, when reviewing a business or personal credit history and a bankruptcy is noted that has EVER taken place then there is likely to be a loan decline. The government and the SBA have spearheaded this guideline and the industry has followed somewhat closely behind.
Is there hope after bankruptcy? Of course there is but the ship will need to be placed on a different course. Conventional (or prime) loan sources are closed once this issue is located. Fortunately private money has again made it available into the commercial arena and is generally far more lenient provided that the existing debt is able to be serviced and the building, or collateral, is a very high quality. In other words, a poor quality run down building will not be attractive to anybody. Combine the poor quality and run down building with poor credit and there may not be a credit solution for a consumer or business. In residential terms we used to ask this question is terms such as how many months out of bankruptcy, or what happens if they are in bankruptcy. To reiterate, today it is just that they HAVE been adjudicated bankrupt.
Today, much more emphasis is placed upon analyzing the complete credit situation and circumstances that a borrower and business find themselves in. This situation will absolutely require a complete credit analysis rather than a ‘quick look’ so that an accurate credit decision can be made.
