Filing for bankruptcy is very popular right now. Times are tough and people can’t keep up. However, don’t fret too much! Although things are difficult, something has got to give. For example, changes are in the air regarding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Therefore, according to The National Law Journal, a well thought out plan may give individuals who are guarantors of real estate companies the option to reorganize under Chapter 11 and retain one or more of the companies and the buildings owned by them without any continuing guarantee liability.

And if that’s the case…many of these Chapter 11 filings will not have to see a courtroom. Desperate times call for desperate measures. Rather than lose hope, search for alternatives offered out there. They do exist.

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As major financial corporations are crumbling down, multimillion-dollar companies seeking bankruptcy protection can’t secure funding. They are also losing pledged money to save their operations resulting in liquidations and thousands of job losses.

“It is not just the consumer that is running low on cash, but major financial institutions are running short on cash and are having trouble borrowing to cover their loan commitments,” said Peter J. Gurfein, a restructuring specialist in Akin Gump Strauss Hauer & Feld’s Los Angeles office.

According to Gurfein, “the heart of the problem for companies trying to emerge from bankruptcy is lack of funding to pay for it, or withdrawal of previously committed funds.”

Filing a Chapter 11 bankruptcy means that the company has the ability to put off existing debts while attempting to raise capital and restructure their business in order to remain above water. However, as reported in The National Law Journal, “failure to keep up with payments in bankruptcy, or find money to exit as a viable business, may prompt what’s called a Section 363 liquidation sale, or even a conversion to a Chapter 7 liquidation for the sale of assets.”

“A lack of funding to assist troubled businesses through a tough economy is widespread,” said Victor G. Milione, head of the restructuring practice in the Boston office of Nixon Peabody. “We’re seeing it across all segments of the revenue stream for our clients as well as companies not our clients, from midcap to large-capital companies and those publicly traded.”

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What was once on top of the Wall Street foodchain is slipping into the dark abyss. Lehman Brothers Holdings Inc. has filed Chapter 11 bankruptcy on September 15. The filing, which lists assets of $639 billion and $613 billion in debt (ouch), names Harvey R. Miller and Shai Waisman of New York’s Weil, Gotshal & Manges as Lehman’s lawyers and only eight other lawyers so far for creditors and other parties.

In the end, the bankruptcy is likely to encompass upwards of 100 lawyers on the Lehman side and roughly thousands for the creditors, stated Evan Flaschen, a partner in the Hartford, Conn., office of Bracewell & Giuliani. In fact, Bankruptcy lawyers are already fielding calls from potential claimants to the stock brokerage firm’s assets.

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In recent months, the amount of foreclosures filed throughout the country has more than doubled from the same time period last year. The reasons for such high percentage of filings are numerous. Primarily, the sub-prime mortgages have landed in the hands of individuals who most likely did not qualify for convention financing. Thus, the interest rates on the loans remain higher than other conforming loans. Additionally, many of the sub-prime loan products involved adjustable rates (ARMS) which typically re-set within the first few years of the loans inception.As sub-prime loans relate to Chapter 13, the typical scenario is as follows: The homeowner qualifies for the loan without a substantial down payment and without significant income documentation. The monthly payment is a stretch for the homeowner; however, it is temporarily manageable. Depending upon the type of ARM, the loan may reset in one, two or three years. It is at that point in time that the homeowner may not be able to make the new, higher mortgage payment. The homeowner is also unable to refinance the debt on the property since the type of loan products needed to accomplish that task no longer exists. Thus, the homeowner is in quite a tough situation. The current real estate market would make it nearly impossible for the homeowner to sell the property and pay off the mortgage. Chapter 13, known as the home saver case, would not be practicable in the case of adjusting ARMS.

The idea behind Chapter 13 bankruptcy is to allow a homeowner to catch-up on whatever mortgage arrears have arisen in addition to making the current mortgage payment on time. As rates adjust and loans reset, the homeowner simply cannot make the current mortgage payment, let alone a partial payment to catch-up. The situation is basically a doomsday for both the homeowner and the mortgage company. The homeowner was banking on the ability to make the payments and/or refinance the outstanding debt at a later date. The lack of real estate appreciation has led to the inability on the part of the homeowner to do just that.

What we are likely to see is a large number of homes on the market for sale. Many of the borrowers will file for Chapter 7 bankruptcy and not Chapter 13 bankruptcy. I believe that the market will take five to seven years to begin to show some signs of appreciation. It will be interesting to see if Congress amends the bankruptcy code to allow mortgage debts to be adjusted. If not permanently, then for a short time frame of three to five years.

David M. Siegel is the author of Chapter 7 Success: The Complete Guide to Surviving Personal Bankruptcy. He is a member of the American Bankruptcy Institute and currently practices bankruptcy law in Chicago and its surrounding suburbs. Additional information is available at www.chapter7success.com

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