What Do You Do When a Borrower Goes Silent?

Question

Hey everyone,

I wanted to get some perspective on a situation a friend of mine is dealing with. They’ve done a couple of private money lending deals, had agreements and promissory notes in place, and everything looked solid upfront. But now the two borrowers they funded have completely stopped responding.

What would you do in this situation? Has anyone here had to deal with borrowers going dark even with paperwork in place? Did you pursue legal action, work with a collection agency, or find another route that helped recover the funds? Put liens on the properties?

Curious to hear how others have handled this. Thanks in advance for any insight you can share.

JD Martin · Answer

If they are lending on real estate they should have secured the note with a lien on the property. If they didn't do that or if these are signature loans they are probably SOL.

Jeff S. · Answer

Assuming this is in Colorado, at the absolute minimum, your friend should have a Note and a recorded Deed of Trust. The note is the promise to repay, and the recorded Deed of Trust (DOT) provides the lien against the property. Additionally, we use a Security Agreement, which further ties the collateral to the loan, especially if there is personal property involved, and defines many other loan requirements. I add this because when you refer to "agreements," do you mean specific Security Agreements, or are you speaking generically?

Who determined that "… everything looked solid upfront"? Did your friend obtain loan docs from a lawyer and use a title company to close?

The recorded DOT, and only the recorded DOT, gives your lender friend the right to foreclose. Without it, the note is unsecured and not worth more than an unsecured IOU. DOTs are recorded immediately after the loan is funded, typically through title, not upon default.

Borrowers in trouble are similar to homeowners facing foreclosure and are often in denial. Going dark is not unusual if that's the case. Or they know what they're doing and are taking advantage of your friend's bad(?) process.

Either way, the first thing is to send a demand letter detailing the reason for the default (not answering the phone is not a reason) and the amount owed, with perhaps a 10-day period to bring the loan current. This should be sent certified to all known addresses. After that, it becomes very state-specific. (E.G., In CA, this would be followed by a Notice of Intent to Foreclose.)

Your friend should also speak to a foreclosure trustee. A trustee will be able to explain the foreclosure process in your state at no cost. Foreclosing on a deed of trust is relatively quick and easy.

If she used proper paperwork, which included a note and a recorded DOT, she should be fine whether the borrowers ever respond or not. If there is no DOT, as you seem to imply, she really should speak to an attorney. The same applies if the loans are in a mortgage state.

I hope for your friend’s sake that we are all just misreading what you wrote, Deborah.  Good luck to your friend.

Clayton Silva · Answer

They did not put a lien against the homes?  Whew, not an attorney here, but my guess is they are going to have a difficult time getting any of that back.

I would immediately call a real estate attorney and have them review the note and agreements and give guidance/course of action.  I also never recommend promissory notes ever except to trusted friends and family with a lot of cash.

Mike Grudzien · Answer

Act on the Lien...

James Wise · Answer

file lawsuit / foreclose.

Chris Seveney · Answer

get an attorney and file foreclosure suit against them. If you have a personal guaranty also get a deficiency judgment against them as well. Private lending is a  business not a how nice a person can I be contest

Clayton Silva · Answer

My thoughts exactly...this isn't their first rodeo either is my guess

What Do You Do When a Borrower Goes Silent?

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