subject: How Chapter 11 Real Estate Bankruptcy Can Reduce Underwater Liability In Foreclosure [print this page] People, corporations, partnerships and limited liability companies have an option to protect themselves in the case of a bad mortgage investment on real property that was secured with a risky or inflated loan. Chapter 11 real estate bankruptcy, or single asset chapter 11 filing can be used to catch up on missed payments or force restructuring of a loan that is underwater into a reasonable debt load.
Such a filing can be used for personal or commercial property, and while the bankruptcy code was not designed for this purpose it still is able to provide the real property owner who is struggling with a legal means to solve a difficult problem. Filing sets up an automatic stay against foreclosure and can force lenders with liens on the property to agree to a restructured payback plan that is more realistic and likely to be paid off in full.
What exactly can this be used for and what is "single asset real estate"? The Bankruptcy Code says this: "a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental." 11 U.S.C. 101(51B). Therefor any property that fits this definition can be saved in this fashion.
Attacks from secured creditors are forced to cease with the filing and the debtor has 90 days to file a reasonable plan of reorganization or to make interest payments. In some cases the deadline is 30 days from the first court assessment that it is a single asset real estate case. If the debtor selects interest payments then they must meet the original non-default amount on the original contract to ensure that the stay remains in effect. Once the interest payments are being made then the debtor will have the option to make a plan for repayment that can include new capital, refinance, sale or cure through a payment plan over time.
The ability of a debtor to force creditors to accept a reasonable repayment option often called a cram down is very useful in those cases where it can be proven that such a plan is fair, equitable and not discriminatory to the dissenting class of creditors. This is one of the few ways to force a creditor to follow a legally mandated plan that is fair to both parties as arbitrated by a court of law. In the case of secondary liens or classes of secured creditors on the same property where values have dropped such a plan can override objects of those creditors. While such a plan must show that impaired creditors are not subject to discrimination, the fact is that court mandated loan modification can save both the debtor and the creditors while finding a solution to overextended loans set on inflated property values.
