If the bankruptcy was due to unwise or irresponsible management rather than unfortunate circumstances, the truth is nonetheless equally important. Depending upon the amount of time that's passed, the amount of money lost by creditors, and how the borrower has fared since the action, the lender may still consider the loan proposal.

Litigation

Not coincidentally, because more than three-quarters of the world's lawyers are in the United States, American citizens generally carry higher odds than others of being sued over a dispute. This exposure is increased even more dramatically for small business owners. As such, people can spend considerable amounts of money and suffer severe financial damage even when the only situation that comes to fruition is an accusation.

When a business owner's financial statement is blemished by the significant expense of defending a lawsuit, or when he or she has settled a suit to limit such costs, the loan officer is necessarily entitled to a detailed explanation of the occurrence. By putting the issue into context and perspective, the borrower can help the LO to understand the impact of the litigation on the company's finances. It also allows the borrower to move the application process beyond the legal issues so that the positive aspects of the loan proposal itself can be emphasized and evaluated.

Most lenders won't proceed with a loan request if there's a material lawsuit pending at the time of application. Routine matters that occur in the normal course of business and do not threaten the borrower's financial condition, however, will generally not have an impact on the application process. But if any matter of true substance against the company remains unresolved or is in appeal, the lender will probably wait until final judgment has been rendered before moving forward with the proposal.

Divorce

Divorce has led to disaster for many small business owners. Because the process can be extremely strenuous for the individuals involved, underperformance with regard to business responsibilities has often been the result. Furthermore, financial settlements have also been known to be highly disruptive if a borrower is forced to buy out or share the business ownership interests with an ex-spouse.

If the business owner has recently completed the divorce process, it's important to provide the lender with an explanation concerning any impact that the divorce may have had on the business or the owner's personal financial condition. Again, supporting documents should accompany the brief, such as copies of bank records, financial statements, and a copy of the final divorce decree. However, personal (in other words, emotional rather than financial) aspects of the divorce should be avoided, as they are not only irrelevant but could also be potentially detrimental to the loan application.