One of the trends we’ve been noticing in the past year or two is the increasing use of the “individual” Chapter 11 case. Chapter 11 bankruptcies can be filed by businesses or individuals. Usually an individual Chapter 11 case comes about when a person either has too much debt to do a Chapter 13 case, or has some other specific reason to be in a Chapter 11.
We’re seeing more professionals (dentists, doctors, lawyers, accounts, architects, etc) file Chapter 11 cases. Why? Because you can do things in Chapter 11s that you can’t do in any other chapter. You are basically your own trustee. You have a lot of flexibility in proposing a reorganization plan. You can do “cram downs” on things like real estate or vehicles or business equipment that you can’t do in any other type of bankruptcy. So, it’s a very powerful tool to have.
People with real estate portfolios are also finding that Chapter 11 is a great way to get the mortgage creditors to accept a restructuring of the mortgages, so that you are only paying what the house is worth, not what you owe. No other type of bankruptcy can do that. We have handled real estate Chapter 11 cases (both personal and business cases) and are experienced in the issues that come up in such cases. Most consumer bankruptcy attorneys are not experienced in Chapter 11 cases, so it is important to have counsel who will know the nuances of this area of the law.
Upon the filing of the Chapter 11 bankruptcy petition, the debtor, be it a business or an individual, becomes a debtor and debtor-in-possession. The debtor-in-possession has the majority of the rights and responsibilities of a bankruptcy trustee. The debtor-in-possession can file actions with the bankruptcy court to avoid transfers of money to creditors, obtain loans for the debtor, and accept or reject contracts. Although nearly all of the debtors who file Chapter 11 cases are actually unable to pay their debts as they become due, there is no requirement that debtors be in any particular financial condition in order to file. That is, a person or corporation does not have to be insolvent in order to file a case. A debtor can file a case even if the debtor is solvent. A debtor can file a Chapter 11 case even if the value of the debtor’s assets exceeds the amount of the debtor’s liabilities and even though none of the debtor’s obligations are currently in default.
Chapter 11 cases are complicated. If you are thinking about reorganizing your real estate portfolio, are a professional in need of some financial help, or just want to get information, please contact us. We can help.
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