"I am actually surprised by your question. The 1111(b) election is not often made. It is designed to protect the non-recourse lender from the Debtor's retention of the property in times of low property values so the debtor does get the benefit... "
What's the benefit? A 380,000 mortgage cram down to a 143,000. Where is the advantage of a 1111(b) and a mortgage almost 3 times a cram down due to a 1111(b) election?
Chapter 7 Bankruptcy Attorney
1111(b) enables the lender to retain a "payoff" amount on the loan in the full amount of the claim so that the debtor cannot cram down then flip the property for a quick profit. This is a simplified answer. Read the law reviews for a more thorough treatment.
This answer is for discussion purposes only and will not be considered legal advice. Further, a court could potentially decide the question contrary to my answer.
7 lawyers agree
The initial question was what are the disadvantages of a lender making the election. I provided some background on why the 1111(b) election is included in the bundle or rights creditors are granted in chapter 11. If the election is made on a 380,000 mortgage, the secured claim becomes $380,000.00 and $380,000 plus interest has to be repaid in the plan. The only way around the election is to sell the property. The 1111(b) election can put the debtor in a situation that the Debtor cannot confirm a plan. This is a simplified answer to a very complicated statutory provision,. I do hope you have an experienced lawyer well versed in chapter 11 plan confirmations assisting you.
Chapter 11 Bankruptcy Attorney
So far answers have been:
1. Retain payoff amount
2. Make plan infeasible
I agree and I'll add, get paid more if the stream of payments do not add up to the note and the unsecured is not paid enough to compensate for the difference.
The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here. Please visit my web site: www.avanesianlaw.com for more information about my services.
4 lawyers agree
The decision whether or not to make the 1111(b) election involves a bit of speculation over the future value of the subject property and the discount rate which the lender invokes to determine the risks involved in tying up its money for an extended period. A lender who timely (before approval of Disclosure Statement) makes the election, must receive the present value (not necessarily the interest rate provided for in the Note) of the entire amount of its claim (even if the collateral is worth less than the amount of the claim). The advantage to making the election is the preservation of the principal amount. The downside is that the Debtor can pay that principal amount over an extended period at a lower interest rate. The lender must evaluate its opportunity costs to determine whether it makes sense to take less sooner and reinvest in another loan with a higher yield.
Posting questions anonymously and receiving general answers do not substitute for consulting with an attorney licensed to practice in the jurisdiction in which you live. Answers posted here by Kevin C Gleason are only intended for general education of the public on legal matters. Please consult a qualified professional before deciding what to do about your situation.
Just to supplement the other answers, I believe that once a creditor makes an 1111(b) election, he/she/it is precluded from raising an absolute priority rule objection, so assuming the debtor is able to find a way to make payments over time on the full amount of the secured claim, it could work to the debtor's advantage.
Mark Markus has been practicing exclusively bankruptcy law in California since 1991. He is a Certified Specialist in Bankruptcy Law by the State Bar of California Board of Legal Specialization, AV-Rated by martindale.com, and A+ rated by the Better Business Bureau. His webpage is www.bklaw.com
Legal disclaimer: Mark J. Markus practices law in California only. The information is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. Answering this question does not in any way constitute legal representation.