In the experience of attorney Alan Ostrowitz, whose firm, Ostrowitz and Ostrowitz, represents banks in collections proceedings, the modus operandi of many small businesses is to stick their heads in the sand.
When a business has stopped payments on its loans or lines of credit and its banks try to open a discussion, many business owners simply ignore all communications. “You’d be surprised at the number of people who get a letter from the bank and ignore it,” says Ostrowitz.
It doesn’t stop there. When the bank receives no response to its letter, the file goes to legal, which generates another letter, also ignored. What comes next is a summons served by a sheriff on the business and the person, and these are similarly ignored, as are the court papers that follow. “Everyone is in denial,” says Ostrowitz.
As businesses are wringing their hands and hoping things will get better, defaults on loan payments are out of control. “It’s getting rather ugly out there,” says Ostrowitz. “The number of cases we have has exploded.” Although he does not keep statistics, his own anecdotal experience suggests that the problems in this economy are not over.
“The sheer volume of cases from the banks we represent is increasing, and the number of bankruptcies filed by small businesses is increasing,” he says. “The first wave were consumer defaults, and now the businesses that support the economy are in trouble.”
Ostrowitz will present “Nuts and Bolts of New Jersey Collection Practice” at the New Jersey Institute for Continuing Legal Education on Wednesday, September 1, at 6 p.m. at the New Jersey Law Center in New Brunswick. The course covers the Fair Debt Collection Practices Act, key state and federal statutes and regulations, pre-filing and filing considerations, prosecution, and post-judgment procedures. Cost: $135. To register online, go to njicle.com. For information, call 732-214-8500 or E-mail email@example.com.
Ostrowitz offers small business owners advice on how to respond to their banks if they are in default on bank or Small Business Administration loans or lines of credit:
Establish a line of communication with the bank. If business owners choose to ignore the reality of going into default and instead keep hoping something will turn up, they will soon hear from an attorney like Ostrowitz. “We will do what we have to do,” he says. “We will enter the court judgments, and we will repossess whatever collateral has been given to the bank.”
For small startups, that usually means the business itself and personal real property.
Although this sounds dire, in reality the banks would prefer a different outcome. “Banks don’t really want their residences, and they don’t want to foreclose,” says Ostrowitz. “They would rather have a performing loan, and, if not, they want a stream of payments coming in.”
If businesses are open with the bank, the two entities can often develop a solution that works for both. “Every day people work things out at a level before it gets to me,” says Ostrowitz. “Or, if it gets to me early on, we can work something out in litigation so they can keep the house and business. We can restructure the loan so it is manageable, and the bank has a stream of payments and the business owner can move on.”
Provide the bank with a full and honest accounting of the business’s finances. The bank needs to understand exactly where the business is and will need access to a business’s accounts receivable, accounts payable, projections, and tax returns.
If the business is asking for any form of debt forgiveness, it will also have to show that it has no ability to repay. “Be honest with the bank and give it the information it needs to make the decisions,” he says. “Banks have to account to shareholders and to the government.”
But banks also have to be careful. In his practice Ostrowitz sees instances in which banks are asked to reduce the interest on a loan, and it turns out the business owner is sitting on unreported assets. “That is asking the bank to give something up for nothing; they are gaming the system,” he says. “If we run into that, we play hardball.”
Ostrowitz grew up in Maplewood and South Orange. His father owned Gilbert Plastics, a manufacturing company in New Brunswick, and his mother taught junior high school in Brooklyn.
Ostrowitz earned his bachelor’s in history from NYU in 1974 and his J.D. from Washington University in St. Louis in 1977. Before starting his own firm in Manalapan in 1980 he worked for small firms in Manhattan and New Jersey. His firm, which has three attorneys, represents financial and commercial firms and institutions in foreclosures, work-outs, and repossession; contract collection litigation; and creditor bankruptcy actions.
Complicating matters today is the tough spot banks find themselves in. They are caught between two conflicting governmental desires. The government is telling banks, on the one hand, “You have all these bad loans; if you don’t clean up your act, we’re going to close you down,” and on the other, “Cut these some people breaks and give them loans.”
The reality is that when the credit market dries up, people can’t refinance and get out of their financial difficulties. Ostrowitz notes that a similar situation existed in the early 1990s, and the economy managed to pull out of it. But he feels as though the problems today are deeper and more persistent. “It seems like bankers didn’t learn the lessons of the ’90s, and people don’t always do things that are in their own self-interest.”
But business owners who want to help themselves do have options. “Get into the dialogue early, before it’s too late, before you lose the business, before the hammer comes down at the sheriff’s sale,” Ostrowitz says. “That’s when the ball game’s over.”