17 August 2026
/ Scott S. Weltman
Developing an Effective Recovery Strategy for Defaulted Commercial Loans
When a commercial loan goes into default, developing an effective recovery strategy begins with identifying the key issues that will influence the best path forward. These matters often transition to a Bank's Commercial Workout, Special Assets, or similarly named department, where early assessment and strategic planning are essential to maximizing recovery.
Key Questions to Address Early
At the outset of every commercial loan default, several critical questions should be answered:
- Who is liable for the debt? Are there one or more guarantors?
- Is the business still operating, and if so, where is it located?
- What collateral secures the loan, and is it worth pursuing or liquidating?
- Is litigation necessary, or is the borrower willing to work with the bank to resolve the default?
Once these questions have been answered, the bank and its legal counsel can work together to develop the most appropriate recovery and litigation strategy.
Opening the Dialogue
The recovery process typically begins by contacting the borrower and any guarantors to make a formal demand while also inviting discussion. Some borrowers respond promptly and are willing to provide the information necessary to negotiate a resolution. Others fail to respond altogether, requiring the matter to move quickly into litigation and collateral enforcement.
When a borrower is willing to engage, gathering financial information becomes the next priority. Understanding the challenges facing the business, obtaining meaningful financial disclosures and evaluating the borrower's willingness to implement both short- and long-term solutions can often lead to a negotiated workout. In many cases, this results in a forbearance agreement that establishes payment terms, provides the borrower with temporary relief and creates a roadmap for bringing the loan back into compliance while maximizing the bank's recovery.
Evaluating the Collateral
Collateral should remain a central focus throughout the recovery process. Important considerations include:
- What collateral secures the loan?
- Is the bank's security interest properly perfected?
- Does the bank hold a first-priority lien or a junior lien?
- What are the costs, timing and practical challenges associated with liquidating the collateral?
- Is the borrower willing to voluntarily surrender or sell the collateral, or will the bank need to pursue repossession or foreclosure?
There is no requirement that collateral be liquidated immediately. Every decision should be guided by a thorough cost-benefit analysis that weighs the expected recovery against the expense and time required to pursue enforcement.
Planning Beyond Judgment
If negotiations fail, litigation often becomes necessary. In most cases, the lawsuit ultimately results in a judgment, whether through settlement or by court order. However, obtaining a judgment should not be viewed as the end of the recovery process.
Before filing suit, banks should already have a post-judgment strategy in place. Determining how the judgment will be enforced is critical to ensuring that the investment of time and legal expense results in meaningful recovery. In certain cases, such as loans guaranteed by the Small Business Administration (SBA), obtaining the judgment may satisfy the bank's required obligations. In many other situations, however, additional collection efforts will be necessary.
A Strategic Approach Maximizes Recovery
By identifying the key issues early, maintaining open communication when appropriate and developing a thoughtful recovery strategy, banks and their counsel can maximize recoveries while minimizing losses. Every commercial loan default presents unique challenges, but a disciplined, strategic approach positions lenders for the best possible outcome.
If you have questions about commercial loan workouts, litigation or recovery strategies, feel free to connect with Cleveland Shareholder Scott Weltman. With decades of experience representing financial institutions in complex commercial collection matters, Scott can help develop practical, effective solutions tailored to your institution's needs.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship, or be legally binding in any way.
