Explaining Negative Circumstances to the Lender
Many borrowers have faced special circumstances that weakened their position for getting a business loan or diminished the lender's enthusiasm for considering the request. Such circumstances can vary greatly, ranging from youthful indiscretions to medical tragedies. Often the situations have nothing to do with the borrowers's past business performance, moral commitment to repay debts, or prospects for succeeding in the future, and many lenders realize this. It's therefore important for the borrower to be thoroughly honest with the lender in disclosing these occurrences.
The suggestions provided here are for the purpose of assisting borrowers to overcome those negative situations under which their personal credit record may have been tarnished due to events beyond their control. They are not intended for use to help build excuses against willful deceit, fraud, or irresponsible behavior. By following these common-sense tips in explaining the particular circumstance, borrowers can give lenders the additional information that they may need to make insightful and fair credit decisions.
Bankruptcy
Unfortunately, bankruptcy is a fact of modern life. Since the laws governing it were liberalized in the 1980s, the number of businesses and individuals seeking financial protection has increased dramatically. In actuality, from a purely business standpoint, bankruptcy is often a legitimate strategy. It's a method of handling overwhelming liabilities or otherwise dire situations. Although certainly abused by some, bankruptcy can, at times, be the debtor's most rational decision. However, it must be stated that it is not always a good strategy, and it can be extremely costly. Many business owners receive poor advice and run to bankruptcy prematurely, without sufficient regard for the consequences that it brings. And once the decision is made, those consequences will remain with the debtor for many years.
If the borrower has been involved in a bankruptcy case (whether personal or business), the lender will discover this fact early in the application process. So it's better for the borrower to disclose the facts before the lender reads the scant information contained in a credit report. Additionally, because bankruptcy proceedings are a matter of public record, the lender will also be able to obtain a copy of the borrower's case file in order to verify the dates, creditors, debts, and final results of the case. In other words, any fictionalized accounts of the case on the part of the borrower could permanently destroy any credibility with the lender. However, before referring to the bankruptcy, the borrower should ensure that the lender is indeed interested in the transaction. If the loan officer (or, LO) isn't comfortable with the merits of the deal before learning about the bankruptcy, there's virtually no chance that the borrower will be approved once the information comes to light.
In addition to verbally disclosing the particulars of the bankruptcy to the loan officer, the borrower should also provide a written version for subsequent review. Because the LO will almost certainly have to relay the information in writing, it better serves the borrower to supply a detailed transcription as the basis for the report.
The borrower should document the circumstances thoroughly and substantiate any difficulties that led to the decision to seek bankruptcy protection. If the borrower was not at fault, proof should be offered in the form of affidavits from other parties, accident reports, medical records, pictures, newspaper articles, or any other information available to support his or her position. Furthermore, if the bankruptcy has been discharged, the borrower should provide a detailed summary – with supporting documents – of how the case was resolved and what the borrower has done since the case was dismissed.
