How does a personal foreclosure effect an LLC that you own?

Question

My question is, If your in business and own an LLC that is up and running and been holding it's own for about six years, but now find that a loan taken out personally but is now about to fall in default. How does it effect your LLC? Could your company be drawn into call on a foreclosure?

Karen Margrave · Answer

You should probably go talk to a Bankruptcy attorney

Wayne Brooks · Answer

The lender would have to pursue and obtain a defiency judgement for the unpaid balance of the loan, after foreclosure.  This would be a personal judgement against the borrower.  I don't think It would attach to the property in an LLC, but to that individual's interest in the LLC.  You might be able to get a deficiency waiver, by doing a short sale, prior to the foreclosure auction.

Douglas Frankow · Answer

The LLC is owned by two people that are married. One of the owners also has a mortgage for a home. That home mortgage is now in default. The LLC is doing well and holding it's own showing great growth. The biggest problem is that now after five years of struggle, the lease equipment is now being paid off through the LLC. Leaving it without the lease protection. Can this equipment be attached to by the lender of the home mortgage? Thanks everyone for your input.

Account Closed · Answer

The LLC will be impacted, but it depends on the nature of your LLC.  Are you holding the foreclosed property in the LLC as Chris Martin is suggesting?  Is this the only property being held by the LLC?  If the property is held in the LLC it will be impacted in many ways.

If the LLC is unrelated to real estate and doesn't hold this property it will still be impacted because personal guarantees may carry less weight.  The impact will be much less though.

Chris Martin · Answer

I have multiple questions: It sounds like a single member LLC. The LLC is holding the property, right? And the property in the LLC was financed via a personally guaranteed loan, right? (The property may have been deeded to the LLC at some point other than at property acquisition.) If this is the case, what happens is the person on the mortgage/deed-of-trust (the debt grantor) will be served via notice in a foreclosure action. Depending on the trustee, the person and the LLC may be served. The current deed holder (your company, the LLC) will more likely be party to the suit if there is an assignment of rents clause in the mortgage.

My disclaimer: I have seen the above in an NC foreclosure case, your state may vary

Bill Gulley · Answer

No. But,

A foreclosure only effects the secured property and your personal credit. But if there is a deficiency and a judgment is awarded against you, that may attach to all of your assets. Then it's time to talk bankruptcy if you qualify.

As to credit, most LLCs fly with personal guarantees of the members and should they have poor credit that will cause problems for the business.

A deed given in lieu of foreclosure is not good either, but better than a foreclosure, if you have that option. Better yet would be a short sale, dump it. Assuming you can't gring the loan current. Good luck!