Recently, I’ve met with a number of clients with the same situation: In addition to their homes, they also own several pieces of investment property, some without any mortgages on them. As a result of the economy, they have had trouble with their tenants paying rent, and haven’t been able to sell the properties. The resulting bad cash flow results in their burning through their savings, and falling behind on the mortgages on their homes. I usually get the call when they are facing foreclosure (which prompts our meeting).
Most attorneys would first think that their case would be a typical Chapter 13–catch up the mortgage arrearages over time. The problem is that the poor cash flow would set a Chapter 13 case up for failure, since if the monthly mortgage and trustee payments couldn’t be made, the case couldn’t succeed.
Are these people out of luck? No. The answer, surprisingly, may be a Chapter 11.Many consumer bankruptcy attorneys view Chapter 11 as something to be avoided. Complex and expensive, most consumer bankruptcy attorneys are unfamiliar with its twists and turns, and do not have the comfort level to recommend it as an option unless the client owes more debt than is allowed in Chapter 13 ($360,475 in unsecured debt or $1,081,400 in secured debt). And if the client is under these debt limits and eligible, a Chapter 11 isn’t even on their radar. But in cases of “land rich, cash poor” clients, it may be a perfect option.
There are several reasons why. First, so long as the property has an “equity cushion,” that is, it is worth significantly more than is owed on it, there is no requirement that monthly mortgage payments be made between filing and confirmation, a period that can often last six (6) months or more. In a Chapter 13 case, mortgage payments restart with the next payment due after filing. Deferring these mortgage payments gives the debtor the ability to focus on making the mortgage payments on their (usually upside down) home. Second, Chapter 11 cases are more typically funded through the sale of property than Chapter 13 cases, and a debtor can gain time to sell the property and use the proceeds to pay off debt. Third, while Chapter 13 cases require monthly payments beginning 30 days after the case is filed, Chapter 11 has no such requirement. I have had Chapter 11 cases confirmed where the only payments that are made come from the sale of property. Finally, your bankruptcy attorney may agree to defer some or all of the up front fee if there’s enough equity in the property and a very strong likelihood that he/she will be able to be paid from the proceeds. In Chapter 13 cases, most attorneys will require a sizable chunk of the fee before the case is filed.
So, if you have property with equity that you want to sell, but a low income, and have fallen behind on your mortgage…a Chapter 11 may be a good option.
About Brett Weiss, Maryland Bankruptcy Attorney
Brett Weiss has been practicing in the areas of bankruptcy for the past 26 years. Mr. Weiss has received international media attention in connection with the cases he had handled. He has been interviewed by Barbara Walters on The View, appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. An honors graduate and award-winning National Moot Court Competition national finalist at the University of Maryland School of Law, Mr. Weiss served as law clerk to the Chief Administrative Judge of the Anne Arundel County Circuit Court before entering into private practice. Regularly appearing before the United States Bankruptcy Court, state and federal courts throughout the State of Maryland and the District of Columbia, Mr. Weiss is a strong advocate for his clients.
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