Loan modifications in the commercial context usually yield better results than in the consumer world. This is because there’s usually a loan officer who is assigned to a troubled credit and has responsibility over collecting information, making fundamental decisions, reporting to committee and finally closing a loan modification or forbearance deal. Unlike the consumer world where debtors wait for monolithic lenders to return with an answer as to the modification that will be permitted, in the commercial world the debtors are responsible for making written proposals to lenders to cure the default or modify the loan.
This is important because lenders don’t like to negotiate against themselves and recognize that debtors have a much stronger grasp on their cash flows, their operations and their ability to repay the debt.
Commercial lenders also recognize that debtors can more easily modify loans in bankruptcy when the loans are commercial loans, so they also want to stay out of bankruptcy if possible. Loans secured by home mortgages that are the debtor’s principle residence are not subject to modification in a bankruptcy proceeding unless the lender consents.
So how does a borrower go about obtaining a loan modification in a commercial setting? The process generally begins by debtors making written proposals to the lender. It is important that in these proposals the debtor promises to make payments that are in line with what they can afford, not what they think the lenders want. If a lender is willing to undergo the time, effort and expense to negotiate and draft a forbearance or modification agreement they don’t want to face an immediate default by their borrower. That’s why borrowers need to be realistic in their promises after default so that they can rebuild credibility and a constructive commercial relationship. By promising only as much as they know they can deliver debtors are much likelier to have a successful negotiation and a happy creditor.
