Bankruptcy or Deficiency?

As a bankruptcy and real estate finance attorney in Charlotte, NC, I meet with many over-extended real estate investors who face the North Carolina foreclosure process. Real estate investors who have acquired highly leveraged portfolios and are now having a hard time servicing their mortgage payments. Perhaps a construction loan has reached or is past maturity and no source of permanent financing is in sight. Sometimes you can’t find a tenant that will pay enough to cover the monthly mortgage amount.

Whatever the scenario, a workout with the lender has the potential to yeild favorable results. Mortgages can be modified, forbearance agreements reached. Problems come into play when lenders are unwilling to work with borrowers whose credit scores have taken a hit due to the downturn. Real estate investors who are heavily dependant on leverage are hesitant to further damage their credit score by filing bankruptcy.

However, foreclosures damage a borrowers credit as well. Another concern in a foreclosure situation is the deficiency judgment. Institutional real estate investors are often able to negotiate non-recourse loans. In a downturn it’s not unusual for investors to simply walk away from properties and any remaining equity. Smaller, more entreprenurial investors are often forced to personally guarantee their  mortgages leaving them with deficiency judgments post-foreclosure sale.

As real estate markets decline, highly leveraged investors risk more than just the property; they may be risking personal assets too. Many of my clients find it advantageous to surrender some or all of their real estate portfolio through bankruptcy because the bankruptcy laws protect them from deficiency judgments.

Everyone’s situation regarding foreclosure is different and therefore the options to remedy are different too. Knowing your options will make all the difference as it pertains to your financial future. Make sure you have access to a knowledgable team of real estate and backruptcy attorneys to help guide you along.