RESIDENTIAL INVESTMENT PROPERTIES & COMMERCIAL & MIXED-USE PROPERTIES
A Chapter 11 bankruptcy begins by the filing of a petition in the bankruptcy court. In most cases, a bankruptcy filing triggers the automatic stay that prohibits creditors from further collection actions such as foreclosure and enforcement of rent assignments. The debtor also becomes the "debtor in possession," which refers to a debtor that keeps possession and control of the debtor's assets while undergoing a reorganization under Chapter 11, without the appointment of a case trustee. Generally, the "debtor in possession" operates the business and performs many of the functions, and has many of the powers and duties, of a bankruptcy trustee.
Chapter 11 is typically used to reorganize a business, which may be a corporation, partnership or sole proprietorship, although individuals may file a Chapter 11, too. The debtor proposes a plan of reorganization that classifies and provides for treatment of different kinds of claims and interests, including secured and unsecured claims, taxes, unexpired leases and executory contracts. Creditors whose claims are impaired under the plan get to vote to accept or reject a plan.
A debtor may sell some properties with equity to fund a Chapter 11 plan, or may propose a liquidating plan. Such a plan sometimes allows the debtor in possession to liquidate the real estate under more economically advantageous circumstances than a Chapter 7 liquidation.
Once a plan is confirmed by the bankruptcy court, the debtor receives a discharge, which typically eliminates much of the general unsecured debt. The debtor is required to make plan payments and is bound by the provisions of the plan of reorganization. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts. An individual debtor, however, does not receive a discharge until the plan is completed unless it is a liquidation plan.
The U.S. Trustee of the Department of Justice plays a major role in monitoring the progress of a Chapter 11 case and supervising its administration. The U.S. Trustee can appoint a committee that consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor's conduct and operation of the business; and participates in formulating a plan.
A so-called "cramdown" provision in the Bankruptcy Code can be very helpful to owners of investment or commercial properties that are overfinanced, or "underwater." Under this provision, the court sometimes may confirm a plan over a secured creditor's objection as long as the creditor receives payment of either its entire claim or of the value of the property securing such claim, whichever is less. It allows the debtor to modify the mortgage to reduce it to the fair market value of the property and eliminate the unsecured portion, thereby making the mortgage more affordable. This rule, however, does not apply to a mortgage solely secured by the debtor's principal residence.
Single-asset real estate debtors are subject to special provisions of the Bankruptcy Code. The term "single asset real estate" is defined as "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." The Code provides for more protection of a creditor with a claim secured by single-asset real estate by making it easier for it to obtain relief from the automatic stay unless the debtor files a feasible plan of reorganization within a reasonable period of time or begins making interest payments to the creditor within a certain period of time.
