Mike Smith seeks your counsel about a problem that has grown out of a decision he made three years earlier to buy a warehouse. Up until then, he had rented three warehouses, where he stored containers and did pick-and-pack for retailers importing goods from abroad. Figuring it was time to consolidate, Smith found a building, negotiated a price of $3.5 million, put down $300,000, and borrowed $3.2 million from a bank at 7 percent interest.

It seemed like a good idea at the time. Then a recession hit. As his sales dropped, he struggled to make his monthly payment of $27,000. At present, he's behind in his payments and scared. Furthermore, the situation seems unlikely to improve anytime soon. To make matters worse, he signed a personal guarantee on the loan and thinks he might lose his house. The bank is assessing the situation to decide what to do.

In a panic, Smith tells you, I'm going to tell the bank I need eight months. It can take the money I'll owe for that time, plus what I owe now, and tack it onto the end of the mortgage. What do you think?

How do you know that's what the bank is looking for? you ask.

I have to offer them something, Smith says. My wife and I could lose everything!

You aren't going to lose everything, you say, and you're making a mistake to assume that you know what the bank wants.

Question 1 What guidance will you give Smith in negotiating with the bank?

Question 2 Why might you advise him not to go into a meeting with bank officers with a plan already in mind?