Foreclosure questions regarding LLC & Personal Guarantee

Broker · Atlanta, GA · Member since 2014 · 47 posts · 17 votes

I am looking for some advice for a close friend and client. He got into a deal with a hard money lender and was able to complete the house build and is waiting for the house to sell. The hard money lender is threatening to foreclose due to the length of time the project has taken. I know what everyone is going to say, just drop the price of the house and pay the lender back. He understands that, his question is, if the lender does foreclose, and the house is able to sell for enough to cover the debt plus some, will the foreclosure still show on his personal record because of the personal guarantee he signed or will it just be a foreclosure on the LLC's record? He's trying to save his credit at this point just in case.

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Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

@Daniel Humphries It depends on the lawsuit... and local law. Research the concept of deficiency judgments in the jurisdiction of your friend’s property.

In a simple foreclosure, the sole defendant would be the LLC owner. If the foreclosure were to result in a deficiency (the lender is not made whole), then a suit (or additional claim) against the guarantor might follow... if permitted and worth the effort.

If your friend is never a named defendant it should not affect credit. Further, if named but no judgment is entered, or the balance is $0 or negligible, same difference.

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Ugo Okoro
Accountant · Atlanta, GA · Member since 2019 · 3 posts · 0 votes
7y
@Daniel Humphries I am not sure. I will google it or ask a lawyer. But since he/she guarantee the loan then it will hit his/her credit
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Daniel Humphries
OP
Broker · Atlanta, GA · Member since 2014 · 47 posts · 17 votes
7y
I tried google before coming here. Unfortunately it's a pretty specific situation. He's looking for an attorney to consult now but figured I would check here incase someone has dealt with this before.
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Ehsan Rishat
Specialist · Carlsbad, CA · Member since 2018 · 1k+ posts · 638 votes
7y
Your friend's credit will probably take a hit.
Let me know if you find out something different. Good Luck!
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Joel Thompson
Investor · Kirkland, WA · Member since 2017 · 121 posts · 53 votes
7y
This seems like the logical first option, has your client communicated with the lender where he's at with the project, and asked for an extension?
HMLs typically just want to get the investor on to the next project and their money out to fund the next loan. Might seem obvious, but sometimes people just avoid/ignore when receiving calls/notices like the ones your client is getting.
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Daniel Humphries
OP
Broker · Atlanta, GA · Member since 2014 · 47 posts · 17 votes
7y
They have asked him to extend and want to charge a $20,000 extension fee. He may end up having to just sign the extension to avoid the foreclosure but just wants to get the facts so he can choose which route to take.
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Erin K.
Professional · Loudonville, OH · Member since 2015 · 125 posts · 37 votes
7y
The HML will certainly sue both the LLC and the personal guarantor personally. The CRAs pull from the court records, so will pick up and report the foreclosure from there.
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Joel Thompson
Investor · Kirkland, WA · Member since 2017 · 121 posts · 53 votes
7y
Originally posted by @Daniel Humphries:

They have asked him to extend and want to charge a $20,000 extension fee. He may end up having to just sign the extension to avoid the foreclosure but just wants to get the facts so he can choose which route to take.
That sounds like a really frustrating position to be in. Hopefully he can get the project sold quickly and hold the lender off in the meantime.
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Hector Avila
Specialist · El Paso TX & Austin, TX · Member since 2018 · 4 posts · 0 votes
7y
If he signed the personal guaranty then that possibly gives him complete exposure because the fine print clearly states that it will become a "personal guaranty" in the event of the LLC. failing to comply with terms. This is the risk that most hard money lenders predict, so that's how they make their business. Not all of them but a few do.
The liability from a LLC reduces exposure from assets in the event of a lawsuit. I'm not an attorney but a friend gave me this same advise when I opened up my first credit account with an equipment rental company. I skipped on signing the personal guarantee for that reason and I had to dispute it with the credit department. Luckily I had good enough business credit that they allowed me to proceed.
Hope this helps and good luck
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Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
7y
@Daniel Humphries It depends on the lawsuit... and local law. Research the concept of deficiency judgments in the jurisdiction of your friend’s property.
In a simple foreclosure, the sole defendant would be the LLC owner. If the foreclosure were to result in a deficiency (the lender is not made whole), then a suit (or additional claim) against the guarantor might follow... if permitted and worth the effort.
If your friend is never a named defendant it should not affect credit. Further, if named but no judgment is entered, or the balance is $0 or negligible, same difference.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
HML does not report to fico.. and it just depends if fico picks up the notice of default..
many times they don't.
if the property sells at auction for enough to cure the lender then that's it.
if it sells for more than whats owed the lender and their are no other liens your buddy would get the overage.
foreclosures if done right are extremely fast in GA.. 60 to 90 days..
lender may or may not sue on the PG if the borrower really has no money its a waste of time and energy for the lender..
and they wont sue just to sue.
what your friend could get though is a 1099C debt forgiveness.. which is ordinary income to the IRS>. so would not owe the lender but will owe tax on the forgiveness of debt.. I used that card many times to get my borrowers to settle up.. easier dealing with me than the IRS>.
ones that were stubborn I sent them out and the next thing you know they are calling me and freaked out.
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Daniel Humphries
OP
Broker · Atlanta, GA · Member since 2014 · 47 posts · 17 votes
7y
Thank you for all the responses! I am relaying this information to him, i'll be sure to let everyone know the outcome.
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Daniel Humphries
OP
Broker · Atlanta, GA · Member since 2014 · 47 posts · 17 votes
7y
As an update, he refinanced out of the hard money loan and is going to airbnb the property. Thanks to everyone for all your help!
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