June 01, 1996

Bankruptcy Remote Structures in Mortgage Loans (1996, 10:03)

Bankruptcy Remote Structures in Mortgage Loans

By Frederick Z. Lodge, Robert E. Michael and Christopher S. Dewees

Among the lessons real property secured lenders learned during the recent real estate recession is that a borrower's bankruptcy can severely impair a lender's ability not only to realize its projected yield on a loan but also to realize on the security for the loan. Foreclosures, which can take a few months to a few years to complete, are delayed if not totally supplanted by the borrower's bankruptcy. Notwithstanding a lender's security interest, a bankrupt borrower is often permitted to use (and, hence, diminish) a lender's collateral during the bankruptcy. Moreover, in some cases, a bankrupt borrower can "cram down" a secured lender through a reorganization plan, freezing the lender's position for years at low interest rates and reduced security.

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