Has anyone successfully bifurcated 1st lien on rental property?

[seabird]

I'm looking at a possible personal ch 11, there are 7 rental properties.

My understanding is the BK code allows to bifurcate rental property 1st liens into secure and unsecured portions, based on current market value. I.e. home is worth 200k, 1st lien is 300k, so you file a motion to bifurcate that into 200k secure claim and 100k unsecured.

I'm pretty sure the code allows this, however, I've heard that the lenders are fighting it a lot, and maybe the judges are often siding with the lenders.

So, my question is -- has anyone heard of someone successfully getting the 1st lien on a rental property reduced to current market value using this technique?

[HHM]

You can bifricate it, but here is the catch....

You must be able to refi out at the reduced amount.

So, taking your example.
Loan $300K
CMA, $200K.
You file chapter 11 and divide claim into its secured and unsecured portions. What you don't know is that you need to "buyout" the secured portion. Chapter 11's are a true reorganization, but part of the reorg for secured debt typically involves "new" financing. So, you need find a lender, or other source of financing (a partner, etc), that comes in and pays the current lender the $200K.

You have other considerations. If the properties are that upside down, are they worth keeping, do they have cash flow. etc. Can you even afford a chapter 11. (just the filing fee charged by the BK court is $1,039). Also, these investment properties, after the strip down, must be cash flow positive. A Chapter 11 does require positive cash flow to fund the reorg. Attorney's fees for chapter 11 are relatively high, in any major metropolitan area, you can expect $20,000 just to "start" plus an hourly fee.

[seabird]

Thanks for your reply. Do you happen to know the part of the ch 11 BK code that refers to this requirement? I've read the code, spoken with 5 experienced ch 11 attorneys, and nobody has mentioned this. I have heard that this is a requirement for ch 13, but my understanding has been that ch 11 is more open/flexible.

I've heard different thoughts on pos cash flow. For example, say I am $1000 negative in total, but have $7000 per month steady income with $4000/m other expenses. I'm wondering if this could possibly be acceptable, given that they are long-term investments and the rents are still rising 10%/yr, etc. So, in other words, I would be pos cash flow including my personal income.

I've been typically quoted around 15k-25k, which would be well worth it given the amount under water, if the loans could really be brought to current market value. I have enough for a retainer as well (but not much more cash than that).

[HHM]

spoken with 5 experienced ch 11 attorneys, and nobody has mentioned this

What are you even asking then...what did they tell you? With as simple a question that you are asking, that it would have been answered by the 5 experienced chapter 11 attorneys you already spoke too.

Here is the problem...sure, you can strip down a lien...but you need to pay the value of the lien INSIDE the chapter 11. That is why, as a practical matter, you need new financing. Otherwise, you are in chapter 11 for 25+years. Though theoretically possible, no one can afford, nor is it practical, to be in chapter 11 that long.

Anytime you modify a lenders rights in bankruptcy (chapter 7, 11, 13, etc), when it comes to secured debt, the lender must get what the bankruptcy says they are entitled too, WITHIN the BK.

[seabird]

Do you happen to know the part of the BK code which indicates this for ch 11?

[justbroke]

Do you happen to know the part of the BK code which indicates this for ch 11?

HHM has accurately stated how most Chapter 11s operate. Watch how any major corporation, even the recent GM Chapter 11, worked. You can come out of Chapter 11 Bankruptcy real quickly, if you can refinance the debt. Otherwise, you're in for the long haul, which isn't practical.

There are many parts of the Code which decides how secured lenders are treated. The largest portion of this can be found in 11 USC 506. So, as a learning exercise, Chapter's 1, 3, and 5 (of Title 11) are the same for all cases filed under Chapter 7, 11, 12, or 13 (and even Chapter 9). Many of the provisions of how debt, the estate and creditors are handled are in Chapter 5.

Specific rules for "which Chapter of Title 11 Bankruptcy" you filed under... address additional rules for "adjustments" of debts under those specific Chapters... specifically Chapter's 7, 11, 12, and 13.

What is your very specific question, because HHM is explaining several things and I'm unsure what you're still caught up on.

[seabird]

My very specific question is, has anyone bifurcated a 1st lien into secured and unsecured debt.

Also, every attorney I've talked with has said that in Ch 11 you can -restructure- loans on investment property, i.e. you can for example, bifurcate based on current market value. None of them have said if you do this you must pay the secure portion off completely within 5 yrs, although I've heard that's the case with ch 13.

I'm currently researching cases on the PACER system -- I'm trying to find any examples of this (bifurcation of 1st lien on rental property). If anyone knows of one being done, please let me know which district and the name or case number, I'd really like to see an example.

I'm also looking for examples of lien-stripping, just to see what it looks like.

[justbroke]

My very specific question is, has anyone bifurcated a 1st lien into secured and unsecured debt.

Yes, it certainly is done very often. However, individual Chapter 11 debtors are much different from other Chapter 11 debtors (like large corporations). A large corporation is looking to be out of Bankruptcy as quickly as possible!

Also, every attorney I've talked with has said that in Ch 11 you can -restructure- loans on investment property, i.e. you can for example, bifurcate based on current market value. None of them have said if you do this you must pay the secure portion off completely within 5 yrs, although I've heard that's the case with ch 13.

Yes, you can restructure just about anything in a Chapter 11. However, the Plan is very different in a Chapter 11. First, a Chapter 11 restructuring Plan can be more than 5 years. It doesn't have the limitations of a Chapter 13. You may want to ask your attorneys specifically how long it would take you to pay off that secured portion. Otherwise, all Chapter 13 debtors would just file a Chapter 11 (for $1,000 in filing fees) and be able to strip significant debt from their primary residences.

In a Chapter 11, your creditors get to vote on your plan. The creditor who has the most juice (debt owed to them) usually wins. So, this means that you need to structure it carefully and in such a way that a creditor or creditors don't object to your plan.

I'm currently researching cases on the PACER system -- I'm trying to find any examples of this (bifurcation of 1st lien on rental property). If anyone knows of one being done, please let me know which district and the name or case number, I'd really like to see an example.

On these issues, don't look at PACER. You need to be looking at caselaw. See William J. Wade (U.S. Trustee) v. Nathan and Beverly Bradford (Debtors) 39 F.3d 1126 (10th Circuit Court of Appeals, 1994)... Eastern District of Oklahoma Case No. 94-7072. BRADFORD refers to Nobelman (landmark bifurcation case) and Dewnsup. While you can bifurcate a secured creditor's claim in a Chapter 11, the creditor can still elect to have the value of their allowed claim paid during the plan (in it's entirety) if they choose to forgo any deficiency claim. Notice that the value of their "allowed secured claim", in full, must be paid over the life of the Plan.

This is why HHM referred to the fact that many Chapter 11 debtors will just refinance the debt, in order to get out of Chapter 11 as quickly as possible.

I'm also looking for examples of lien-stripping, just to see what it looks like.

This depends on your District and whether it's done by motion (contested matter) or by Adversary Proceeding (complaint). You could hunt down the case above, but you need to check your local District to see whether they handle Motions to Determine Secured Status and Avoid Lien or Liens... as complaints (adversary proceeding) or just ordinary contest matters (by motion and hearing).

[seabird]

thanks justbroke, btw what would be the best way for me to research case law like the ones you mentioned?

[justbroke]

thanks justbroke, btw what would be the best way for me to research case law like the ones you mentioned?

Subscribe to Westlaw and Lexis, or brute forth Internet searching with lots of patience. If you live close to your City's courts, they usually have a "public" law library, where they generally have at least one Westlaw/Lexis terminal. This would make searching free. They still charge you for printing. I like the law library because it's free.

In a similar manner to save money, the U.S. Bankruptcy Courts always offer free public access terminals for PACER. The only thing that costs is printing (and it's REALLY high priced at $0.50 a page). in those cases, I recommend writing down the case number, and document number, then returning home, searching by the specific case, and then pulling the Docket Report by specific document number, and printing it at home after saving the PDF file locally. In almost all cases, that's cheaper.

Your issue is going to be that most Chapter 11 cases are filed by business and not individuals. However, all the rules apply and a business is just an "individual" entity. So, a business bifurcating a secured claim is no different than an "individual" doing the same in Chapter 11.

Here's the Bradford case: http://ftp.resource.org/courts.gov/c...6.94-7072.html

That's about the extent of my Chapter 11 awareness. I almost had to file Chapter 11 myself due to some debt limits. I am luckily still in a Chapter 13.

[Angelcity]

Am I missing something, or does the Bradford case basically say that you can bifurcate a first mortgage under Chapter 11????? The decision seems to say that "there is absolutely no language in chapter 11 evidencing an intent to afford home mortgage lenders special treatment."

If this is true, can I use a Chapter 11 to cram down my first, provided I pay off the secured portion within the term of the BK?

And if I've missed something in Bradford, can I use in re: Bradsher, which says a first mortgage is not solely secured by real property if the lender is impounding taxes and is therefore subject to bifurcation.

[HHM]

Am I missing something, or does the Bradford case basically say that you can bifurcate a first mortgage under Chapter 11????? The decision seems to say that "there is absolutely no language in chapter 11 evidencing an intent to afford home mortgage lenders special treatment."

If this is true, can I use a Chapter 11 to cram down my first, provided I pay off the secured portion within the term of the BK?

And if I've missed something in Bradford, can I use in re: Bradsher, which says a first mortgage is not solely secured by real property if the lender is impounding taxes and is therefore subject to bifurcation.

No, you are not missing something, that is what we have been saying all along. The catch, as you pointed out, is you must pay the secured portion inside the plan. As a practical matter, most people can't do that.

[justbroke]

Yes, Chapter 11 lets you touch the forbidden holy grail of bifurcation... your primary residence. This is because the part of the Bankruptcy Code that prohibits bifurcation of the debt is in 11 USC 1322(b)(2). Notice the "13" in "1322". That means it's part of the Chapter 13 code. It is not "incorporated" in any way into the Chapter 11 code. Therefore, only Chapter 13 prohibits that bifurcation of a loan on a primary residence.

Bradsher is very specific to mortgages which have a security interest in both the property and an escrow account. Also remember that these cases are not the law of the land. The Bradford case is 10th Circuit Court of Appeals.

A Chapter 11 is not cheap by any means. It's $1,000 just to file the case, and attorney fees that I have seen, start at about $7,000 - 10,000 for an "individual" Chapter 11.

[Angelcity]

[QUOTE Also remember that these cases are not the law of the land. [/QUOTE]

So is it likely or unlikely that a BK judge would grant me the bifurcation? If it's likely, then the Chapter 11 fees are something I'm gonna have to come up with. If it's unlikely, then I should try another route. The only thing is-- for the life of me I can't figure out another route.

I'm trying to modify/offer a payoff to my lender (Aurora servicing for HSBC), but I'm not getting a lot of traction. The only loan I have on the property is a 2 mil 1st. The house just appraised at 1.2 mil. Welcome to the California real estate market, the sequel!

I hope I'm seeing a light at the end of the tunnel and not an oncoming train when I consider going Chapter 11......

[HHM]

The real question, where are you going to get 1.2 million to pay off the crammed down amount. Also, if you have disposable income, that becomes a problem. Individual Chapter 11's are still "payment plans", if you suddenly create an $800,000 unsecured debt by bifurcating; the US Trustee will require payments if you can afford it.

Realistically, your OTHER choice is to simply walk from the house. Don't rule that out because honestly, it will probably be cheaper than trying to fix it in Chap 11.