Reduce Your Mortgage Debt in a Single Asset Real Estate Bankruptcy
If you are a natural person, corporation, partnership or limited liability company that owns an income producing parcel of real property and you are behind on payments or perhaps “underwater" you should consider filing a single asset Chapter 11 real estate bankruptcy.
With the collapse of the economy and the resulting decline in real estate values, be it homes or commercial real estate, the Bankruptcy Code offers solutions for the real property owner in distress.
Not only can the automatic stay set forth in 11 U.S.C. 362 provide needed relief by staying foreclosure, but the “cram down" provisions of the Bankruptcy Code allow confirmation of a Chapter 11 plan that alters the rights of secured creditors who hold liens on real estate.
The term "single asset real estate" is defined in the Bankruptcy Code 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." 11 U.S.C. § 101(51B).
In a single asset real estate case the debtor may fend of attacks from the secured creditor if the debtor files a feasible plan of reorganization or begins making interest payments to mortgage holder within 90 days from the date of the filing of the case or within 30 days after determination that the case is a single asset real estate case. The interest payments must be equal to the non-default contract interest rate on the value of the creditor's interest in the real estate. 11 U.S.C. § 362(d)(3).
If the debtor in a single asset real estate case can maintain the necessary adequate protection monthly interest payments, it will then have the opportunity to propose a plan of repayment that typically takes the form of an infusion of new capital, refinance, sale or cure through a payment plan over time.
One of the most important features of a reorganization plan in Chapter 11 is the ability of the debtor to “cram down" plan provisions on objecting creditors so long as the debtor proves that the plan is fair, equitable and not discriminatory to the dissenting class of creditors.
"Cram down" is one of the most essential bankruptcy concepts in chapter 11 of U.S. bankruptcy code because through it one can get a chapter 11 bankruptcy reorganization plan confirmed by a court even when there is objection or disagreement from one or more creditors.
Creditors who are subject to a plan “cram down" because they are taking less than they are owed or who reject the plan are referred to as "impaired creditors."
In order to have the plan approved by the court over the objection of the “cram down" creditors, the debtor must show that the plan does not unfairly discriminate against the impaired creditors.
In the context of “underwater" real estate a Chapter 11 plan “ cram down" allows the bankruptcy courts to modify mortgage loan terms subject to the condition of fairness and anti - discrimination in an attempt to have all parties come out better than they would have without such modifications
Section 11 U.S.C. 506 of the Bankruptcy Code provides that a lien is only secured to the extent there is value in the asset to which it attaches. If a claim exceeds the value of the collateral, that portion of the claim is considered unsecured. As a result, in Chapter 11 even voluntary liens like mortgages and trust deeds can be stripped down to the value of the collateral.
In Gold Coast Asset v. 1441 Veteran Street, the Court of Appeals for the Ninth Circuit considered a bankruptcy court's authority to lien strip in a Chapter 11 case where a plan is not confirmed. 144 F.3d 1288 (9th Cir. 1998). The Gold Coast court found that the rationale applied by the United States Supreme Court, in Dewsnup v. Timm, 502 U.S.
410, 417-419 (1992) prohibits lien strips unless the bankruptcy court confirmed a plan. Id. at 1293. The Court determined that a lien could, however, could be stripped with res judicata effect by confirmation of a Chapter 11 plan.
Significantly, 11 U.S.C. §1129 provides particular protections for undersecured creditors who object to a plan, and confirmation of the plan is the event that discharges the debtor's prepetition obligations. See Id. at 1293 citing Wade v. Bradford, 39 F.3d 1126, 1128-29 (10th Cir. 1994); In re Bowen, 174 B.R. 840, 852-55 (Bankr. S.D.Ga.1994); In re Dever, 164 B.R.132
In sum, if you are underwater on any type of real estate business property loan such as a warehouse, office building or other type of structure you can file a "single asset real estate" Chapter 11 bankruptcy and both stave off foreclosure and strip off your mortgage of any secondary or other liens that are attached to the property which are in exess of the property's worth.