• 22
  • February
    2012

The recession has certainly not been kind to the commercial real estate market. When the economy fell, a number of builders, property developers and landlords found themselves burdened with unsustainable debt on distressed commercial real estate. As a result, many are now facing foreclosure. Fortunately, Chapter 11 bankruptcy can offer a source of relief.

What is Chapter 11 Bankruptcy?

Chapter 11 allows individuals, corporations and partnerships to reorganize their debts, assets and business affairs. In doing so, they may be able to avoid foreclosure.

However, debtors who qualify as "single asset real estate debtors" will be required to comply with special rules in order to successfully complete a Chapter 11 bankruptcy.

What is a Single Asset Real Estate Debtor?

An SARE debtor is someone who is seeking bankruptcy based on a single property or project that generates "substantially all" of the debtor's gross income. Further, the debtor must not conduct any business on the property except the actual operation of the property and activities incidental to that operation.

Generally, SARE debtors are involved only in the passive collection of rent and do not operate other businesses on the property. For example, hotels, health clubs and golf courses have been held not to be SARE debtors, since their businesses involved activities beyond the mere operation of real estate.

Initial Debt Relief is Only Temporary

Upon filing for bankruptcy, debtors are granted protection called an "automatic stay," which prohibits creditors from collecting debts.

However, in SARE bankruptcies, the automatic stay is only temporary. Debtors may lose their protection unless they either file a confirmable plan of reorganization or begin making interest payments within 90 days of filing the bankruptcy petition. If the stay is lifted, the creditor is free to pursue foreclosure or other collection efforts.

Of course, every Chapter 11 bankruptcy presents unique concerns to each individual case and situation. If your business is burdened by distressed property or other unmanageable debts, talking to an experienced bankruptcy attorney who can help you understand your options is advised.

Source: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter11.aspx