SBA Loan Workouts: What and Why Do Banks Bid at Auctions for Your Assets and the Effect on the Borrower and Guarantors

Always this question: What will the bank bid at the foreclosure auction? Sometimes it's the full amount of the debt, other times it is nothing and other times it is a small amount above the highest bid. It is an important question as it affects the residual debt of the borrower and strategy associated with resolving these issues.

First let's separate the foreclosure on real estate and that on business equipment. Regarding real estate, we most frequently see the banks bidding in their mortgage amount, even if there are no bidders. A simple reason, when they then re-sell the property they experience the least amount of taxable gain, as their taking the property in at the mortgage amount increases their basis to that amount.

With non real estate assets, they will either willingly allow someone to bid up to an acceptable number or if no bidders at all, they will bid very low just to win the day, and then depending what the assets are, either junk them or attempt to sell them which ever seems most plausible.

Here is another important issue, if you are in foreclosure and the bank bids the full amount of the mortgage, you as the guarantor or borrower no longer will have any short fall liability. The bank has in essence purchased the asset for the amount owed freeing you from any further debt...

If it is non-real estate assets and the bank bids in low or the buyer purchases for less than the debt, the borrower or guarantor will be held liable for the shortfall.