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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An Option Agreement is an agreement between two parties that provides one of the parties with the right, but not the obligation to buy, sell or obtain a specific asset at an agreed upon price at some time in the future. A common type of Option Agreement is found in the real estate market, where one party buys the right to have the first chance of purchasing a piece of property at a specific price at some point in the future. Another common type of Option agreement is a written outline that provides the details of an employee’s ability to obtain stock options.

Purchasing an option to buy goods or real property is a useful mechanism for a buyer who isn’t quite sure whether he wants to buy the goods or property, but wants to reserve the right to do so at a later date. Importantly however, an option contract must be supported by adequate consideration, just like a contract for the good itself. This consideration can be very small such as $1, which is called nominal consideration. But the option cannot be given away. It must be part of a bargained-for exchange.

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To understand the Limited Partnership Agreement, one must first understand the limited partnership. Similar to the general partnership, the limited partnership consists of one or more general partners and one or more limited partners. The general partners act as would be expected. On the positive side, they manage and control the partnership, share in its profits, use its property, and have authority to bind the other general partners. On the negative side, they are all jointly and severally liable for the debts and obligations of the partnership.

Add to this the limited partners who are, as their name suggests, limited in what they can and cannot do. Limited partners can share in the profits, receiving dividends of sorts. They also can avoid the joint and several liability for the partnership’s debts. They cannot, however, bind the partnership, nor do they have management control-usually. But they can sit on the board of directors without being deemed to have management control. Lastly, they are obliged by statute to disclose their status as limited partners to the public, lest unwitting persons think otherwise.

It happens sometimes that limited partners can have management control and the power to bind the partnership, and this leads into the main distinctions between general partnerships and limited partnerships. First, limited partnerships are created not by the intention of the parties but by statute, by filing registration papers with the state. Second, the parties may decide to override the Limited Partnership Agreement by actually endowing the limited parties with rights that they would not normally enjoy. And third, so long as the limited partnership observes certain rules related to limited liability, centralized management, duration, and transferability of ownership, it will benefit from pass-through taxation. Otherwise, it will be taxed like a corporation.

Limited partnerships are also distinguished from limited liability partnerships. In the latter case, all the partners have limited liability. In the former case, only the limited partners have limited liability; the general partners are still on the hook. To address this hazard, the limited partnership may be set up such that the general partner is actually a corporation or LLC.

Limited partnership Agreements have a number of essential clauses. Because the agreements govern the partnership, it is important for them to be clear and complete. They should address the issues of control and authority-may limited partners manage or bind the partnership? They should also deal the purpose of the partnership, its duration and termination; possible assignment of partnership interests (which are regarded as securities by law; the other partners have right of first refusal, too, where a partner is trying to assign the interest); and money-how to split the profits, how they will be taxed, and how to divide the partnership’s debts.

Limited Partnership Agreements are most commonly found in the real estate and entertainment (film) industries, where projects (like constructing a building or making a movie) are of a finite duration and where the duties can be neatly separated. That is, in these situations, the general partners make the investment and control the project, and the limited partners provide the labor and the know-how. All, however, enjoy in the profits-at least theoretically.

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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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