Bank Workouts

Goldstein Bershad & Fried, PC, has been involved in dozens of workouts with all the major lending institutions in the Detroit Metropolitan area.

Insolvent business borrowers with bank debt in default invariably wind up in the bank insolvency sections generally known as the Special Assets Group. The objective of the bank is always the same: eliminate the debt and the borrower. Typically, the bank will require a forbearance agreement under which the borrower liquidates itself under the supervision of the bank.

Banks view the collateral as their property and need to be convinced that it is to the bank's advantage to allow the borrower to liquidate while consuming their receivables. The usual question is whether the bank's position will deteriorate if it allows the borrower to continue in business rather than to immediately shut down. This requires cash flow projections and a liquidation analysis to show that the bank will be better off allowing the borrower to continue in business.

The bank will usually insist on a forbearance agreement with the borrower. The essence of a forbearance agreement is the following:

1. The borrower confesses that it is in default and that the bank is entitled to seize the collateral.

2. The bank agrees to forbear in exercising its seizure rights and allows the borrower to continue in business for a given length of time under bank supervision which usually includes a dominion of funds account (the bank gets all the money and parcels it out to the borrower according to a tight budget), with weekly financial reporting, and a new deadline to payoff the bank.

3. The borrower waives all lender liability claims along with almost every constitutional right known to law.

4. The principals either renew their guarantees or make new ones.

Banks may renew these forbearance agreements with each new one exerting more pressure (like principal paydown) on the borrower to liquidate itself.