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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 35576
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Have a high value equity in real estate. Want to do Chapter

Customer Question

Have a high value equity in real estate. Want to do Chapter 11 for individual. Lawsuit debt is 1.4mm (no judgement yet, and unsecured due to lease contract). Can Chapte 11 be done for fraction of the repayment of the 1.4mm?
Submitted: 2 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 2 years ago.

A Chapter 11, like a Chapter 13, requires at a minimum that impaired creditors who do not voluntarily consent to the Chapter 11 reorganization plan, must receive no less than what they would receive were the debtor to file Chapter 7.

So, while you can reject the lease, and prevent the judgment from becoming a lien on real property, unless you have a homestead exemption that covers all of the equity in the property, then any non-exempt equity must be allocated to pay unsecured debts.

Whether or not this means you can avoid all but a fraction of the equity value of your property going to pay impaired creditors, depends on the value of your homestead exemption -- which varies substantially by state jurisdiction.

Hope this helps.
Customer: replied 2 years ago.

the equity in the real property is over 3mm. My question is more about how is the plan in chapter 11 prepared for how many years of repayment? and if disposable income is only 40K a year how will I repay this debt?

Will the just take 5 years * 40K and that is how much I will pay and all the other is discharged?



Expert:  socrateaser replied 2 years ago.
Given that the debt is $1.4mm, and the equity (presumably not protected by a homestead exemption) is $3mm plus. The plan could stretch income over a 5 year period (five years is all you get, absent consent to a longer by plan the creditor's committee). But, unless that income is sufficient to pay the $1.4mm over the 5-year plan, then you would be obligated to either liquidate the $3mm property, or borrow against its equity to pay off the $1.4mm. As a practical matter, this means that you would need income sufficient to either pay off the judgment or service a $1.4mm loan on some set of reasonably agreeable terms. I estimate you would need at least $8,000 per month income to make your plan work, assuming that the creditor about which you are concerned is the only impaired creditor.

Hope this helps.

The reason is that were you to file Chapter 7, the bankruptcy trustee would liquidate the property and pay the $1.4mm in full. Since the creditor would be entitled to full payment in Chapter 7, the creditor is also entitled to full payment in Chapter 11 -- unless you can convince the creditor to accept a lesser payment.

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