What Happens When an LLC Is Foreclosed by a Bank?

In a limited liability corporation (LLC), the stakeholders or the business share an interest in a property used either for investment or as an operational headquarters. If an LLC fails to meet its financial obligations to the property, it will be foreclosed, similar to a residential property.

Commercial Foreclosures

Commercial foreclosure laws [WORDS MISSING], as residential foreclosure laws will vary from one state to another. However, all foreclosures follow the same process. The borrower is sent a notice of default, informing that the note is past due; a notice of intention to foreclose follows. If the owners do not remedy the default, foreclosure proceedings will begin.

Judicial vs. Nonjudicial

Foreclosures on LLC properties can be judicial or nonjudicial in nature, depending on whether or not the LLC stakeholders are allowed a court date. In court, the stakeholders can plead their case to a judge or contest the foreclosure. In nonjudicial states, LLC-held properties are foreclosed and sold by a bank-appointed trustee; these are more difficult to litigate or contest.

Impact on Credit

When forming an LLC, the stakeholders do so with the understanding that personal assets and credit will not be tied into the business. In an LLC foreclosure, the business credit will be affected, but the personal credit of the stakeholders remains intact. However, if the stakeholders utilized personal credit to purchase the property in question, their personal credit would be affected.

References

• Miller, Shakman & Beem LLP: Commercial Real Estate Foreclosure Checklist
• Tough Times for Lenders: Foreclosures - What Happens to Commercial Leases and Personal Property?
• Seyfarth Shaw LLP: Foreclosing on a Limited Liability Company Interest