On its own, a real estate transaction is a complex undertaking. Even the simplest sale or purchase involves a number of moving parts and people at various stages of the journey to close a deal successfully. Those complexities are magnified when a piece of real estate — from a house or condo to land to commercial property — is involved in receivership or bankruptcy proceedings.
Though it can prove overwhelming at first glance, a basic understanding of the intricacies of real estate sales in relation to receiverships and bankruptcy is crucial to successfully navigating both processes. Below, we offer insight into both receiverships and bankruptcy, the difference between the two, some advantages to both and the importance of partnering with a knowledgeable brokerage to help guide you through these unique processes.
What Is Receivership in Real Estate?
The process starts at the appointment of the receiver, whose primary role is to preserve the property and its value throughout the receivership proceedings.
Duties of a Receiver
Effectively, they serve as a property manager overseeing day-to-day operations, ensuring maintenance, and potentially making improvements to enhance the property's value. Additional receiver duties include:
- Collecting income: If the property generates income such as rent from residential occupants or upholds the lease on a commercial property, the receiver is responsible for collecting and managing these funds.
- Sell a property: As the court requires, a receiver will oversee the private sale of residential or commercial property to satisfy any pending legal disputes between the creditor and borrower.
- Repayment of loan: A part of managing a property's funds includes ensuring repayment of the defaulted loan to the creditor.
- Paying bills and taxes: The receiver also ensures that all necessary expenses, including property taxes, utility bills, and any vendor-based agreements (for commercial property).
- Maintain property value: In their custodial role, the receiver ensures the property is maintained in good condition, coordinating any repairs, improvements, or regular maintenance as necessary.
- Report to the court: Receivers must provide regular updates on the property's status and financials to the court.
What is Bankruptcy in Real Estate?
In this context, real estate assets may satisfy those same creditors without subjecting a debtor to foreclosures, repossessions, judgments, or further lawsuits or legal proceedings, aiming to be clear of the debt. Different bankruptcy chapters, including Chapter 7, 11, and 13 bankruptcies, carry specific implications for real estate holdings.
Bankruptcy cases occur at the federal court level through specific U.S. Bankruptcy Courts, overseen by a trustee.
Duties of a Trustee
- Evaluating assets: Assessing the value of the real estate and determining its role in the bankruptcy process.
- Managing assets: This could involve selling the property to pay off creditors.
- Distributing proceeds: Ensuring that proceeds from any sales are appropriately distributed among creditors.
- Chapter 7 bankruptcy: Sell (or liquidate) a residential or commercial property to satisfy creditors and forgive any leftover debt.
- Chapter 11 bankruptcy: Reorganize a business (or corporation) to pay off debt while maintaining some or all of the entity's real estate holdings. (A trustee may not always be appointed in this type of filing, which is the rarest of the three presented here.)
- Chapter 13 bankruptcy: Restructure individual or business debts so a debtor can pay them off over time while keeping any current real estate assets.
What is the difference between receivership and bankruptcy?
Bankruptcy proceedings protect borrowers through liquidation, reorganization, or restructuring their real estate assets.
A borrower often initiates bankruptcy through voluntary bankruptcy, though cases are initiated by creditors (involuntary bankruptcy). Once in process, an appointed trustee controls the debtor's assets, including real estate holdings.
Objective and outcome
The primary aim of bankruptcy is to resolve the overall debt situation of the borrower while offering protection against active litigation, foreclosure, or collections.
Duration and scope
Advantages of receivership in real estate
The primary advantages of receivership include:
Preservation of property value
Mitigation of legal risks
Maximization of income
Facilitation of sale
Enhanced creditor confidence
Connect with a trusted team of experts
With expertise in receiverships, bankruptcy, conservatorships, probate, and trusts, along with hundreds of satisfied clients, The CREM Group has the knowledge and experience to help guide you through the receivership or bankruptcy real estate process. The CREM Group's proven track record of success in dealing with real estate litigation in the real estate markets of Los Angeles, Orange County, and the surrounding areas will ensure your experience is highly successful.