Chapter 11 Real Estate

Chapter 11 can be a useful tool for real estate investors who are underwater on investment and mixed-used properties or who are unable to maintain all of their properties.

The Chapter 11 Process

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.

Real Estate Options In Chapter 11

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 "Cramdown"

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.

For Single-Asset Debtors

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.

Explore Your Legal Options

Contact us online or call 312-651-4200 to schedule your initial consultation. Our experienced attorneys will work directly with you in determining the right approach to your real estate in Chapter 11 bankruptcy.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.