The federal bankruptcy reform legislation approved by the Senate last week has a number of key provisions affecting real estate owners, developers, and lenders. The House is expected to take up the Senate measure and pass it as early as this week. President Bush has said he will sign it.
For homeowners, the legislation provides new federal rules that limit short-term shifting of assets to home purchases in states with generous "homestead" protection laws. Under the Senate-passed bill, homeowners who file for bankruptcy within 40 months of buying a home, will now be able to shield no more than $125,000 of home equity from creditors, no matter where the property is located. After 40 months of ownership however, existing state homestead rules will apply.
As one example, the bill would prevent a wealthy doctor who lives in Manhattan from suddenly shifting financial resources to purchase a multi-million dollar mansion in Florida as a way to shield assets from creditors after a bankruptcy filing. Under the legislation, for the first 40 months of ownership of the mansion, the doctor could only shield $125,000 in equity in the Florida property. After that time, however, Florida's more generous homestead protections would apply.
The Senate bill also helps landlords who are faced with delinquent tenants who seek to forestall eviction by filing for bankruptcy. The bill instead allows state landlord-tenant rules to govern eviction proceedings.
Condominium and homeowners associations will get new benefits under the legislation as well. The bill defines association fees and assessments as non-dischargeable debts in bankruptcy filings by homeowners.
The bill removes current bankruptcy rules that allow delinquent owners of "single-asset" commercial, and multifamily properties valued at more than $4 million to forestall foreclosures by declaring Chapter 11 bankruptcies. Under current rules, such property owners often delay foreclosure proceedings for months or years, by simply filing for bankruptcy and asking courts to grant "stays" from foreclosure. The Senate-passed bill grants all commercial and multifamily properties -- no matter what their valuation -- eligibility for automatic 90 day stays from creditors. Mortgage lenders had complained that the lengthy stay periods often granted by courts to owners of properties worth more than $4 million, exposed them to unreasonable and unpredictable damages and expenses.
The bill also offers new protections to shopping center owners by giving tenants who file for bankruptcy a standardized 120 days to assume, or reject a lease. This is double the initial time given under current law, which allows retail tenants who declare bankruptcy 60 days to assume or reject a lease. However, courts often have extended this time period for months or years.
National Association of Realtors president Al Mansell, CEO of Coldwell-Banker Residential Brokerage of Salt Lake City, hailed the legislation for "helping curtail the misuse of our bankruptcy code." National Association of Home Builders president David Wilson, a builder from Ketchum, Idaho, also praised the Senate bill for "striking a fairer balance between the rights of lenders and property owners," and providing "sufficient safeguards for homeowners to protect their property in the event of a bankruptcy filing."
