Loan Workouts: What Happened in Texas in the Late 80s? Bankruptcy Filings Spiked!

I was engaged in the "Savings and Loan Debacle" in the late 1980s when hundreds of banks were being shutdown by the FDIC and many notes were being recalled causing defaulted loans and loan workouts. The economy was totally chaotic with interest rates at upwards of 18 percent for normal bank loans and hard money was nowhere in sight. An impossible economy that was in dire need of loan workouts.

One phenomenon that we observed and studied carefully was the unexpected spike in bankruptcies as the economy returned to normal. Interest rates fell and business began to expand for everyone, yet bankruptcies spiked higher than ever! It should have been the other way around... but it wasn't. It seemed that business was returning to health, however, bankruptcies and loan workouts were simultaneously accelerating at a very rapid rate. It made no sense.

Yes, the economy was returning to healthy level, but the small businesses were so damaged and had built up so much unpaid debt in arrears that even though they were all experiencing greater revenues the additional burden of the unpaid debt in arrears from all sources were sinking their ships.

Thus, there was a rush to the bankruptcy courts to clean up the historical build-up once everyone believed salvation and growth was again possible. It made greater sense to strip off the debt instead of loan workouts so the business could flourish in the reviving economy.

Taking history into account, we can surmise you should do the loan workouts now, rather than wait and file for bankruptcy in the face of emergence. My thoughts on this is that if you do the loan workouts, you will be able to reap the benefits. Bankruptcy, on the other hand, will wipe your business out. Loan workouts will support your emergence and free you to succeed no matter what happens.

Waiting for the trumpets to blow announcing the end of the recession and time to do business again as we once did, is also waiting for the sound of bankruptcy as you will never be able to afford the payback. Do the loan workouts now and enjoy whatever happens as you will have cleaned up your business and will be ready for anything.