Real Estate Sales in Relation to Receiverships and Bankruptcy – What's the Difference?

Real Estate Sales in Relation to Receiverships and Bankruptcy – What's the Difference?

  • The CREM Group
  • 01/26/24

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?

Receivership in real estate refers to a process where a court or creditor appoints a receiver to manage the property of a financially distressed entity or individual. This appointment typically occurs in cases of default on a loan where the property serves as collateral toward the final goal of resolving the dispute between the creditor and the borrower.

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

The duties of a receiver are varied and significant. They serve as a court-appointed, neutral third party responsible for overseeing the property (or properties) at the heart of a receivership. As receivers are independent of both creditor and borrower — officially, they are an agent of the court — they serve in the best interests of both parties, with a mandate to take directives from the court that appointed them.

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?

Most often a voluntary process, bankruptcy in real estate comes into play when an individual or entity cannot meet their debt obligations. Generally, bankruptcy proceedings shield a debtor from any collection measures a creditor might take.

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

In bankruptcy, a trustee oversees the debtor's assets, including real estate holdings. Their responsibilities will vary based on the specific bankruptcy filing, with the most common requirements being the following:

  • 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.
In terms of the specific filings, a trustee may serve to:

  • 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?

While both receivership and bankruptcy involve third-party oversight of assets in debt disputes, there are significant differences between the two, including:

Basic protections

Although receiverships and court-appointed receivers provide neutral oversight, creditors are the primary beneficiaries, with a real estate asset used as collateral to protect their loan and maximize returns.

Bankruptcy proceedings protect borrowers through liquidation, reorganization, or restructuring their real estate assets.

Control

Creditors typically initiate receiverships through a court process. The receiver controls the property or properties tied to the dispute or loan default, but the original owner retains ownership rights.

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.

Legal framework

Receivership is a state court process and often allows for more flexibility in resolving disputes, while a standardized federal Bankruptcy Code governs bankruptcy in specific U.S. Bankruptcy Courts.

Objective and outcome

Receivership focuses on managing, preserving, and maximizing the value of the property in question — maintaining the asset's value to protect the creditor's loan balance while resolving the debt dispute with the borrower.

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

While each case is unique, receivership is limited in scope and much less time-consuming, focusing on managing the property during a legal dispute or until the defaulted loan is resolved — ranging from as little as four months up to two years. With few exceptions, bankruptcy proceedings are lengthy, often lasting several years, involving comprehensive restructuring plans.

Advantages of receivership in real estate

While bankruptcy does serve a vital purpose for those who need to take the dramatic step of restructuring their personal or professional financial standing, including any real estate holdings, receivership is a faster and considerably less painful process of resolving a loan default.

The primary advantages of receivership include:

Preservation of property value

As receivers actively manage a property, they ensure it remains well-maintained, which stabilizes the asset and can even increase its value.

Professional expertise

Certified receivers and those they work with are experts in real estate management, ensuring property supervision is by someone who understands the nuances of the market and the efficiency of effective property management.

Mitigation of legal risks

As a court-supervised process, with regular, required reporting, the legal framework of receiverships mitigates risks and ensures property transparency.

Maximization of income

Income-generating assets, such as rental property, may continue to generate revenue and satisfy outstanding debt under the receiver's management.

Facilitation of sale

If required, the receiver may prepare, market, and negotiate property sale terms, positioning it to attract the best possible price while fulfilling the interests of the property owner and creditors.

Enhanced creditor confidence

A receiver's involvement often assures creditors that the property is managed effectively and their interests are safeguarded.

Connect with a trusted team of experts

Whether your real estate journey involves receivership or bankruptcy, partnering with a seasoned real estate broker well-versed in real estate litigation can help you navigate the myriad details of each proceeding, relieving you of a considerable burden during an often difficult time.

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.



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