Do you have a commercial building controlled by a Foreclosure Receiver? Chapter 11 terminates a Receivership and generally returns to the owner to manage the property!
A Receiver’s interest lies in getting his 5% commission and fees for his attorney and his Property Manager.
If you see a path to either reorganizing your business by getting new tenants or refinancing; or if you would like to sell your property at fair market value rather than a foreclosure auction, then Chapter 11 may be for you.
There are pros and cons of filing chapter 11
But you will still have obligations. First, you will have to make current mortgage payments. You can’t simply file chapter 11 and not pay the mortgage. At the very least, you will have to pay current interest, real estate taxes and insurance each month. This must commence no later than 90 days after tiling the case, unless you file a Plan by that date. It’s always best to start right away.
Second, you will have to increase your rental income so the monthly income can support a new mortgage payment. Sometimes the lender will cooperate and sometimes not. The key is to make a plan of reorganization “feasible” so both the Court and the lender will see that a restructure is do-able based upon actual income, expenses, and a mortgage payment that makes sense for the building. No two cases are alike.
The secret to a successful reorganization for a small business is not, as litigation attorneys might suggest, to engage in extensive litigation. That drives up costs for all sides and reduces the risk of a consensual resolution.
Rather, the best approach is to act in good faith so that both the Bankruptcy Judge and opposing counsel see that the debtor is working in a constructive fashion to create a win-win situation.
The risk of filing a chapter 11 when you have an undersecured mortgage (i.e. where the property is worth less than the mortgage) is that the lender will either vote their large unsecured claim against confirmation; or that they will waive their unsecured claim, and retain their full mortgage, that will ultimately have to be paid.
When you are dealing with the original lender in the chapter 11 case, it is more likely that they will be willing to negotiate a restructure. If the loan itself has been sold to a new investor, then the new investor will want to make a large short-term profit rather than staying around for the long-term.
For most small businesses, litigation costs can prevent success. The sooner a business can be turned around, the greater the likelihood of success.
Call Paul Hollender, Board-Certified Bankruptcy Attorney and 15 years listed in the Super Lawyers director. to create a strategy.