When a loan falls into default, it may feel like a lender’s options are boxed in—accelerate, liquidate, and collect. Since the COVID-19 pandemic, it is no question that handling defaulted loans has been increasingly challenging, with certain collection avenues being restricted or limited, depending on the type of credit. However, a lender has various workout tools at its disposal to stave off liquidation and allow a borrower to bring the loan back into standard servicing. And, in the event a lender’s good faith workout efforts are unable to cure the events of the default, lenders still have collection options available, notwithstanding the pandemic.

Workout Options
Exploring workout options before moving forward with strict enforcement of the loan documents can be mutually beneficial for both the lender and obligors. There are various reasons why a lender would want to pursue a workout agreement in lieu of liquidation. Many businesses were forced to pivot their prior business models and/or implement additional safety procedures as a result of the COVID-19 pandemic so a workout can provide obligors with the time needed to get over the learning curve, while maintaining concrete benchmarks for the obligor to meet with respect to the defaulted loan. In exchange for providing a borrower with additional time to cure the defaults, a lender can obtain documents that will streamline a future liquidation process should the workout ultimately not be successful. For example, a lender can obtain a confession of judgment or stipulation for judgment, which would allow the lender to obtain a money judgment against the obligor without commencing a lawsuit, significantly reducing the time and expense typically associated with a money judgment litigation.

If the loan is collateralized by personal property, such as business assets or certificated vehicles, a borrower can execute a voluntary relinquishment agreement, which streamlines the repossession process by avoiding the need to commence litigation seeking an order for replevin altogether.

Likewise, in Minnesota, a mortgagor can execute a deed in lieu of foreclosure. Similar to a voluntary relinquishment agreement, a deed in lieu of foreclosure allows a lender to circumvent the foreclosure process and gain title to the real property by filing the deed with the proper recording office.

Liquidation/Collection Options
However, should workout negotiations fall through, a lender still has liquidation options available to it. In particular, while there is a peacetime emergency declared in Minnesota, there is no blanket state-wide prohibition against foreclosures. Further, while there is a federal moratorium on foreclosures, it only extends to mortgages securing Federally-backed loans. Therefore, depending on the loan, a lender may seek to foreclose its mortgage in Minnesota.

In addition, Minnesota and federal law does not prohibit a lender’s ability to enforce its rights as a secured creditor against business and personal assets securing the loan. Lenders are able to exercise their right of self-help and repossess motor vehicles, recreational vehicles, equipment, inventory, and other assets without obtaining a court order for replevin, provided the repossession does not breach the peace.

Minnesota and federal law also does not prohibit a lender’s efforts to obtain a money judgment against obligors. That said, if the defaulted loan is consumer, there are Executive Orders in effect in Minnesota which limit the collection efforts a lender can implement, including staying the ability of a lender to garnish wages for judgment entered on or after May 4, 2020. Conversely, lenders are permitted to garnish wages and bank accounts to satisfy the amounts due under commercial, agricultural, or business loans. Therefore, collection options are not universal between consumer and commercial loans during the COVID-19 pandemic so lenders will want to closely review each loan and confirm the classification of the loan before moving forward with collection at this time.

While the current financial environment adds a number of challenges with defaulted loans, lenders continue to have the ability to identify routes to recover the loan or initiate action steps in the event of liquidation or collection actions. If you have questions about actions to take when a loan goes into default, please reach out to Jellum Law, Your Legal Department®at Questions@JellumLaw.com.