In this season of shutdowns and rent moratoriums, commercial landlords, apartment owners, farmers, and homeowners alike are at risk of foreclosure due to missed payments on mortgages. When the many foreclosure moratoriums are lifted (most likely in the first quarter of 2021), payments must commence again, and the time to bring payments current will be short. Many real property owners will find themselves unable to bring payments current as rapidly as the law and their mortgage holders may require, resulting in the filing of a foreclosure.
If negotiations with the mortgage lender falter, it is important that the property owner be familiar with the available bankruptcy options to eliminate the debt, or to obtain the time necessary to make up the delinquent payments to retain the property. The options available to the property owner are in Chapter 7, Chapter 11, Chapter 12, and Chapter 13 of the Bankruptcy Code. Each chapter’s provision differ, and not all will be eligible to file under each chapter. The good news is, however, that everyone is eligible for filing under at least one of the chapters.
The filing of a bankruptcy case results in an automatic stay, which prevents the foreclosure from proceeding further. Therefore, if the property owner wants to keep the property, it is critical that the bankruptcy case be filed before the property is sold at auction, either by the lender or the Sheriff. The automatic stay will provide time necessary to formulate and implement a payment plan to the lender. However, if that payment plan is not feasible, the lender may be able to file a motion for relief from the automatic stay to complete the foreclosure. The assistance of an experienced attorney will greatly enhance the opportunities to retain the property.
A property owner who is resigned to the loss of the property, for whatever reason, will most likely be eligible to file a Chapter 7 bankruptcy case to eliminate the debt left over after the foreclosure and sale of the property. Homeowners may have protection from such deficiencies under existing state law, especially applicable to first mortgages, so a bankruptcy filing may not be necessary to eliminate the mortgage debt. Commercial property owners, farmers, and apartment owners will have no such protection. Of course, any individual seeking to file a Chapter 7 case will need to meet the eligibility requirements under the Means Test.
Homeowners and some individuals owning small commercial properties with unsecured debt less than $419,275 and secured debt less than $1,257,850 are eligible for Chapter 13. The advantages of Chapter 13 over Chapter 11 and Chapter 12 include much less cost and expeditious approval of the Chapter 13 plan. In Chapter 13, the property owner can pay off the late payments over the length of the plan, which is typically from 3 to 5 years. Chapter 13 also affords the property owner with little or no equity in the property to consider removing mortgages and other liens.
An individual not eligible for Chapter 7 or Chapter 13, and any business entity faced with a foreclosure, should seriously consider a Chapter 11 filing when faced with foreclosure. A Chapter 11 case provides the time necessary to formulate a plan of payment to the lender. This is similar to a Chapter 13 filing except that under Chapter 11 the property owner has many more options to restructure the payments to the lender. The downside to a Chapter 11 filing is the cost, which is typically much more than a Chapter 12 or 13 case. A Subchapter V, Chapter 11 case under the Small Business Reorganization Act, will be available to those with total debt less than $7,500,000 (which will be reduced to $2,725,625 on March 27, 2021) and provides a more streamlined and therefore less costly means to approve a plan of reorganization.
Family farmers are eligible for a Chapter 12 case. The family farmer may be an individual, partners, a corporation, an LLC, an association, or other entity whose primary source of income is farming. To be eligible for Chapter 12, the family farmer must have total debt less than $10,000,000, regular annual income, and 80% of the value of the assets of the family farmer must be “related to the farming operation”. Once eligible, the family farmer may take advantage of a number of favorable provisions for dealing with foreclosures and to restructure mortgage debt than are available under other chapters.