Chapter 11 Bankruptcy Amongst Homebuilders

As Troubles in The Housing Market Mount, Builders Seek Shelter

The housing market has taken a number of hits in recent months, and insolvent homebuilders are just the latest to seek the protections of the U.S. bankruptcy courts. Independent housing analysts expect the number of insolvent builders to continue to rise in to the first half of next year, and a builder’s financial problems can quickly become the customer’s depending on the terms of the contract and how long it takes for the builder to resume its projects.

In addition to the scores of local and regional builders forced to file for Chapter 11 bankruptcy protection in the past year, major builders have also been forced to consider this route. After reporting a loss of $617 million in the third quarter of this year, TOUSA, Inc., the parent company of Austin, Texas homebuilder Newmark Homes, has announced it is considering filing for Chapter 11 bankruptcy protection. Reports have circulated that the New York Stock Exchange may institute delisting procedures against the company. Levitt & Sons (a Florida-based unit of Levitt Corp.), another major player in the homebuilding industry, filed for Chapter 11 Bankruptcy protection this month.

Chapter 11 gives debtors, such as these insolvent builders, the opportunity to adjust their debts, either by reducing the debt overall, or by extending the time for repayment. Although primarily used by corporations, Chapter 11 bankruptcy protection is available to partnerships, sole proprietorships, and even individuals with certain levels of debt. Chapter 11 is appealing because it allows debtors the opportunity to remain in business and avoid liquidation of their assets. The debtor also has the option of seeking a more comprehensive reorganization, and may propose a plan of reorganization that keeps the business alive while paying creditors over time.

Just like cases under Chapter 7 and Chapter 13 of the Bankruptcy Code, Chapter 11 cases provide for an automatic stay of creditor actions including foreclosures and repossessions of property. Generally, the Chapter 11 debtor is given a 120-day period during which it has an exclusive right to file a plan for reorganization. After the 120 days has passed, creditors also have the opportunity to propose plans. In order to be affirmed by the bankruptcy court, creditors must vote to approve the plan of reorganization.

A Chapter 11 case has the potential to extend anywhere from several months to many years unless the court or another party of interest acts to guarantee its resolution. The expectation is that the creditors’ right to file a competing plan will provide the debtor with incentive to file a plan within the exclusivity period and will also act as a check on excessive delays in the resolution of the case.

The slump in the housing market has meant that builders are forced to struggle with rising inventories, falling home prices and drops in the value of their land. At the same time, banks are less likely to lend to builders and homebuyers alike. For buyers, the risks of builder insolvency range from loss of their deposit to months or years spent waiting for their homes to be built. There is also the risk that builders will stop paying vendors, leading those vendors to place liens on the buyers’ homes. By filing for Chapter 11, builders have the opportunity to restructure their debts, and potentially move forward with a reorganization plan that finishes substantially completed homes or developments and/or sells partially completed developments to other developers or investors.

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