Who Owns This Property?
A True Case I
Mr. Doe, a new immigrant from the US, experienced a few very good years in Israel. After a short period he opened his own business and was very successful from the beginning.
After a period Mr. Doe decided he could afford his own piece of property in Israel. Because he was doing so well he was able to receive a large mortgage from a local bank. The property he bought was very expensive and the monthly payments were high but affordable. Mr. Doe had his property, the bank made a nice profit and the two guarantors he gave felt safe because Mr. Doe was not only a friend but a successful business man as well.
After a year, Mr. Doe became sick and could not work on a daily basis. He hired a manager who dealt with all the bureaucracy for almost six months. This was enough to turn the business into shambles. The business was still too new and unstable to have someone else managing it.
The debts were growing everyday but the income was not growing. Mr. Doe returned full time to the business but he knew that the interest for the loans he took to uphold the business in his absence, in addition to the mortgage, were way over what the business could ever make.
Mr. Doe decided it was time to make a “big time escape” back to the US. He had no court proceeding against him yet and he was still free to leave the country because there was no impediment (ban) on his leaving the country (“Tsav Ikuv Yetsia Min Haretz”).
Friends were worried because they began to receive warning letters from the different banks. The guarantors were especially worried and they decided to talk to Mr. Doe, who promptly calmed them, claiming that if anything happened the guarantee was the property itself because he took an 80% loan and not 100% on the property, paying cash for the 20%.
After a few more months, Mr. Doe was gone. He left a huge amount of debts behind and the first to take action was the mortgage bank. The bank sued the guarantors for the full amount of the remaining loan.
To their dismay, the guarantors found out after hiring a lawyer, the 20% that Mr. Doe had indeed paid in cash was not enough to cover all the expenses the bank was claiming and suing for.
The bank tried to collect the debt from Mr. Doe but this was impossible for many different reasons. Therefore the bank could now legally collect from the guarantors.
The property was sold in a public tender (bid) and after all the deductions, such as lawyer’s fees and court procedures, the guarantors, through their lawyer, ended up paying an equivalent of 2% of the property , which came to a total of approximately $12,000 each.
How come they still had to pay if Mr. Doe had put a 20% cash down payment?
The reason is simple: Mr. Doe took a loan with a grace period of one year (this means there are no monthly payments for the first year). After the grace period ended, Mr. Doe was behind in his payments for at least six months. When the case was finally settled, it had been two years since a payment had been made. In addition, when a bank receives permission from the court to sell a property in a public tender, the price paid is never the real market value.
When a property is sold in this manner, the price goes down between 15% and 20%. When adding the interest paid to the bank, the court and lawyer’s fees, the loss could be more than 25%.
This is true if the market value is stable and housing prices have not gone down. But in this case, the housing prices did devalue a few percentage points.
What could the guarantors have done to minimize their damages? From our experience, we have learned that the faster one acts, the less his damages will be. As soon as the guarantors see the first sign of trouble (this could be a letter from the bank or personal knowledge about the debtor’s situation), do not hesitate to communicate directly to the debtor and speak to his family if necessary. But the first step should be to contact a lawyer who specializes in this field.
In the end, there is always the possibility that a guarantor may end up paying part of the debtor’s debt. If an early agreement is reached with the bank, preferably before any court procedures have occurred, the chances are the monetary damage will be much less.
We all may be guarantors or need a guarantor. The key is to be aware when any potential problem begins and act promptly.
Sincerely,
Tzvi Szajnbrum, Attorney at Law