As a bankruptcy and real estate finance attorney in Charlotte, NC, I meet with many over-extended real estate investors. Entreprenuers who acquired highly leveraged real estate portfolios are now having a difficult time meeting their debt service payments and are left with undesirable choices. Perhaps a construction loan has reached or is past maturity and no source of permanent financing is in sight. Maybe tenants are non-existent at the rental rates needed to cover mortgage payments. 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 recent economic 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.     An additional consideration in a foreclosure scenario is the deficiency judgment. Institutional real estate investors are often able to negotiate non-recourse loans. If things go south they simply walk away from the property and usually only their equity in it. Smaller, more entreprenurial investors are often forced to personally guarantee their  mortgages leaving them with deficiency judgments post-foreclosure. If the property doesn’t sell for the amount of the debt, the investor or homeowner will be left holding the bag. For example, if John Borrower takes out a $500,000 mortgage on his home and is foreclosed on two years later, he will continue to owe his mortgage lender if the property sells for less than $500,000. In a declining real estate market the highly leveraged homeowner risks not only the property but his or her personal assets as well. 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.