Question Confused about dificiencies, dischargeable debts and Chapter 11?!?

[Galaxy2020]

As real estate investors, we are in the process of filing Chapter 11. We just left our attorneys office and we are confused. We had planned on relinquishing several of our rental homes based on the presumption the deficiencies were dischargable. Today I understood our attorney to say that the MORTGAGE deficiency was not dischargable. This is contrary to what he has said in the past. Moreover, is it better to just allow banks to allow foreclosures w/o bankruptcy assuming that they would be less likely to pursue deficiences b/c they would not have any knowledge of the borrower's present financial assets?

[HHM]

Deficiencies are dischargeable. There simply may have been some misunderstanding. Keep in mind, a deficiency only comes into existence when the property is "sold" for less than what is owed or is crammed down in the chapter 11.

However, if you are surrendering the property, why file an 11. Or are you keeping some and not others. Generally, if you are surrendering properties, you would file a chapter 7 (a non-consumer chapter 7), let the properties go, and discharge all debt.

[Galaxy2020]

We do have several free & clear properties & some that have some equity we plan on keeping. Can the deficiencies that may/will occur as a result of the disposal of properties that have negative equity be attached to equities in other properties in Chapter 11? When we first met with our attorney four months ago, he seemed more optimistic about negotiating with our lenders (we have many.) In our conversation with him today, we feel that several months ago the lenders would have given us more favorable results in the negotiations of our bankruptcy terms. I'm wondering if the banks are responding to the present administration's pressure on them - or lack thereof. The health care reform debate has taken center stage and the current banking/real estate crisis is on the back burner (that's how I see it anyway.)

[HHM]

Hell yeah...

If you have properties thate are held free and clear, or have equity, your unsecured creditor (the deficiencies, + whatever other unsecured debt you have, e.g. credit cards) MUST be paid at least the value of those properites.

For example, let's say you have $1MM in equity and properties owned free and clear, and have $3MM in unsecured debt. Because, if you filed a chapter 7, the equity would be liquidated and distributed to creditors; thus, in a chapter 11 (or chapter 13), your unsecured creditor MUST be paid $1MM (the other $2MM will be discharged) The only benefit you get in a chapter 11 is that you have time to pay that money and you are not necessarily required to sell the valuable properties.

So the real question is, how are you going to pay that value. There really isn't a whole lot to negotiate in this scenario.