by Karen Brune Mathis
Managing Editor
Chapter 11 isn’t used primarily by just business anymore.
More and more, Chapter 11 under the U.S. Bankruptcy Code is being used by individuals, and that’s because of real estate investments gone sour. The chapter allows filers to reorganize their debts under court protection.
“More individual Chapter 11s are a result of the bad economy affecting a more wealthy, or formerly wealthy, sector of the population,” said bankruptcy lawyer Ed Jackson.
Many of those individuals found themselves caught up in the crumbling real estate investment market, according to court information. That appears to be especially true in the Jacksonville Division of the Middle District of Florida.
Last year, “75 percent of the individual Chapter 11 filings in the Division were associated with investment properties,” says a report from the U.S. Bankruptcy Court Middle District.
In 2009-10, four out of 10 Chapter 11 filings were made by individuals in the Jacksonville Division, which covers 16 of the 35 counties in the Middle District.
That’s up from one in 10 in 2004-05, court numbers show.
In the Middle District as a whole, three out of 10 Chapter 11 filings were by individuals in 2009-10. That’s up from one in eight five years earlier.
Of last year’s filings, half were associated with investment properties, court information shows.
Chief Bankruptcy Judge Paul Glenn of the Middle District said it was difficult to generalize about the real estate cases.
“They involve many types of properties and many types of investors. Some involve many business properties and some include only a few residential properties. Some are trying to restructure their debt and some are surrendering properties. Some are complex and some are straightforward. Some are highly contested and some are agreed. Some are successful and some are not,” he said.
“And all are interesting.”
Typically, individuals use either Chapter 13, which is a reorganization plan for wage-earners, allowing them to restructure their debt and repay it under the protection of the court, or they use Chapter 7, a liquidation of assets.
According to the court, a Chapter 11 debtor proposes a plan of reorganization to keep its business operating and to pay creditors over time. People in business or individuals also can seek relief under Chapter 11, the court states.
Chapter 7 provides for liquidation, which is the sale of the debtor’s nonexempt property and the distribution of the proceeds to creditors.
Chapter 13 allows individuals with a regular income to adjust debts, keeping property and paying debts over time, usually three to five years. It is also called a wage-earner’s plan.
However, the numbers show that higher-wealth individuals facing real-estate investment debt have been turning to Chapter 11.
One of the higher-profile individuals to have filed for reorganization under Chapter 11 is former Jacksonville Jaguars quarterback Mark Brunell, who cited real estate debt as a reason for his decision to file in June 2010.
The majority of Brunell’s liabilities were related to real estate and business investments and his personal guarantee on real estate debt, including debt incurred with partnerships that involved former Jaguars teammates Joel Smeenge and Todd Fordham.
Chapter 11 “is an attractive outcome to many people holding investment properties that are under water and who are struggling to make the monthly payment,” said Mark Mitchell with Akerman Senterfitt, president of the Jacksonville Bankruptcy Bar Association.
He said Chapter 11 allows individual debtors the opportunity to modify a mortgage, provided that the property securing the mortgage is not the debtor’s principal residence, and amortize the principal balance over an extended period of time.
He said that cannot be done under Chapter 7 or Chapter 13.
“While the Bankruptcy Code provides certain limitations on a debtor’s ability to modify a mortgage in Chapter 11, and although the bank holding the mortgage is able to assert certain defenses, in many individual Chapter 11 cases debtors are successful in modifying both the interest rate and principal balance of a mortgage on non-homestead property, while paying only a fraction of the unsecured indebtedness to creditors under their Chapter 11 plan,” said Mitchell.
Bankruptcy Bar Chair Doug Neway said a lot of the individual Chapter 11 filings would otherwise be Chapter 13 if not for the debt limitations that determine a debtor’s eligibility to file Chapter 13.
Neway said the Judicial Conference of the United States determines the eligibility limits, which now are $360,475 for unsecured debt and $1,081,400 for secured debt.
Neway is the Chapter 13 Standing Trustee of the court’s Jacksonville Division.
Jackson, a member of the bankruptcy bar, said those limits prevent some people from reorganizing under Chapter 13, leaving Chapter 11 as their only available reorganization chapter.
Jackson said that many individuals have multiple rental properties that are under water.
Chapter 13 can last just five years. Even if a person’s debts are below the Chapter 13 debit limits, the person might be trying to reduce mortgages on rental properties to the property value.
“If successful, the restructured mortgage is still too large to pay off during the five-year limit of a Chapter 13. Chapter 11 would allow the reduced mortgage amount to be paid over a much longer period of time, such as 30 years,” he said.
Kevin Paysinger, with the Bankruptcy Law Firm of Lansing J. Roy, said the individual Chapter 11 filings also help the housing market.
“Without the ability to restructure the debt on rental properties, individuals would be forced to surrender these homes. The resulting short sales or foreclosures would devalue the surrounding properties even further,” said Paysinger.
He also offered another reason that Chapter 11 is attractive to individuals.
“Mortgage companies and banks are slow to modify loans and, if the borrower does get a modification, it is usually a minute change in terms,” he said.
“The Chapter 11 allows a court to restructure the debt, including decreasing principal balances and changing interest rates, on commercial properties and residential properties” other than the borrower’s primary residence, said Paysinger, also a bankruptcy bar board member.
“Essentially, the court is doing the very thing that the mortgage companies should be doing without the court’s involvement,” he said.
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Individual Chapter 11 filings
Fiscal year July 1-June 30
Middle District of Florida
| Year | Total Chapter 11 filings | Individual Chapter 11 filings | % of individual Chapter 11 filings |
| 2004-05 | 189 | 25 | 13% |
| 2009-10* | 748 | 231 | 31% |
| Year | Total Chapter 11 filings | Individual Chapter 11 filings | % of individual Chapter 11 filings |
| 2004-05 | 52 | 6 | 11% |
| 2009-10* | 179 | 73 | 41% |