Chapter 11 bankruptcy can help prevent commercial foreclosures.

• Author: Stubbs, Trawick H., Jr.
• Position: LAW JOURNAL 2010

Economic experts have been predicting that commercial real estate loans are the next wave of defaults that will occur in this economic downturn. Commercial loan defaults have already led to a significant increase in companies filing for bankruptcy. Chapter 11 business bankruptcy filings in the third quarter of 2009 increased 23% over the same period in 2008. Federal and state legislation has focused primarily on subprime lending and the consumer foreclosure crisis and has done nothing yet to address commercial foreclosures. Therefore, businesses facing foreclosure or other similar collection proceedings need to examine all available options, including bankruptcy, as a way to restructure debt and hold off foreclosures. Bankruptcy is a powerful tool that can be used to delay or stop foreclosure proceedings and prevent additional foreclosures from being filed. Bankruptcy offers the chance to obtain a fresh start and a return to profitability as an alternative to simply shutting the doors.

There are two types of bankruptcy cases that a company can file: a chapter 7 case that is a liquidation of the business and its assets by a chapter 7 trustee; and a chapter 11 reorganization case. A chapter 11 reorganization case allows a business to restructure its operations and debts, liquidate assets in an orderly manner or undertake a combination of the two. Unlike a chapter 7 case where the trustee makes all the decisions, existing management remains in control in a chapter 11 case. Chapter 11 reorganizations are available for companies of all sizes, from Fortune 500 companies down to small businesses and even individuals who do not qualify for relief under other available chapters.

For a business facing a foreclosure, filing bankruptcy immediately stops all foreclosure actions, litigation and collection activities as a result of the automatic stay that goes into effect upon the filing of a bankruptcy case. The purpose of the automatic stay is to provide the decision makers with time and breathing room to focus on restructuring the company without the distraction caused by foreclosure, litigation or collection efforts by creditors. During this time, the company formulates a plan to repay its creditors and address any necessary changes to the business operations.

In its simplest form, the plan allows a debtor to rewrite the terms of its loan documents for its secured, unsecured and tax creditors and to specify how much creditors will be paid, the terms...