Picture this. You are a lender for a major financial institution when you discover the following:

*Loan payments are late.

*The borrower’s financials are late.

*The borrower is not in compliance with its financial covenants.

*One of the borrowers’ executive officers has left.

*Substantial litigation has been commenced against the borrower.

For the lender, these are clear signs of a deteriorating financial situation of the borrower which requires immediate action.

For the borrower, these should be the warning signs that the lender will shortly be taking action to protect itself if the situation continues to deteriorate.

Different loans give rise to different responses. Unsecured loans give the lender the fewest options and therefore a greater incentive to negotiate a restructuring of the loan. By the same token, unsecured loans give borrowers the greatest negotiating ability to restructure their loan under the threat of bankruptcy. The options under a secured loan depend on the type and value of the collateral.

The threat of bankruptcy always provides the borrower with a weapon which must be considered by the lender before taking any steps to enforce its loan.