Tips in dealing with your banker
Learn from the tips in these continuing articles.
Tip No. 6 – Know your loan default triggers
I believe that this is one thing that every entrepreneur needs to know. In recent years, attorneys have come up with new paperwork that lists “death” as an instance of default in real estate loans. So if you get squashed like a bug on the way home from work, it’s possible your spouse could immediately receive a letter saying that the loan has been called and that the bank requires the payoff right away.
As outrageous as this sounds, the idea has its origins in sound stewardship; it evolved from business loans where there was a concern that, if the owner died, there would be no one around to run the business. Obviously, things aren’t likely to go well in that situation. So the bank wanted to make sure that in those instances, it could get its money back. Businesses assets can go away very quickly following an owner’s death. Real estate is much less likely to change following a death.
I won’t allow the provision and most lenders will remove it if asked, depending on your total situation. You can mitigate it with life insurance as well. I also negotiated with one lender to have a provision that said that the bank could cite my death as an instance of default ONLY after 180 days following death. Note the emphasis on “could:” Banks don’t want good loans to go away, so if the spouse can keep the boat floating, it’s likely to be okay.
But that’s not always the case, and you need to make sure that this default cause isn’t included in any of your loan papers. Before you sign any documents, look at them carefully and review what constitutes an event of default. If your death is listed as a cause of default, have the bank take it out! The larger the bank, the harder it might be to get the clause stricken from the terms, but you owe it to your family to make sure it’s removed.
While we’re on the subject of dying, this is a good time to throw in a bonus tip: Never run a business without life insurance! It’s not fair to saddle your heirs with your mistakes. Life insurance is a great way to insure your wealth – and to make sure that your family will be provided for if something happens to you. (Wouldn’t you rather have them be able to pay off the loans to the business and sell it than to have the bank take it away from them?)
Last of all, when you’re buying life insurance always buy term insurance and never buy whole life. Insurance salespeople make more commission on whole life, so they often push it hard, but term is always the way to go. There may be circumstances where term insurance isn’t a good fit, but get that advice from someone other than the person selling you the insurance.
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Ron Sturgeon is past owner of AAA
Small Car World. In 1999, he sold his six Texas locations, with
140 employees, to Greenleaf. In 2001, he founded North Texas
Insurance Auction, which he sold to Copart in 2002. In 2002,
his book “Salvaging Millions” was published to help
small business owners achieve significant success, and was recently
reprinted. In June 2003, he joined the new ownership and management
team of GreenLeaf. He also manages his real estate holdings and
investments. You can learn more about him at WWW.autosalvageconsultant.com
He can be reached at 5940 Eden, Haltom City, TX 76117, firstname.lastname@example.org or
817-834-3625 ext 6#.