Bankruptcy Considerations When There Is a Default On A Redevelopment Project

Bankruptcy As a Lifeline for A Redevelopment Project

A Chapter 11 bankruptcy proceeding and business reorganization may also be an option for dealing with a financially troubled project. Such a proceeding is intended to provide a brief respite from the immediate repayment of debts and ongoing obligations through a court supervised process. See, 11 U.S.C. Section 101 et. seq. A redeveloper's decision to file bankruptcy, however, will undoubtedly impact the underlying redevelopment project, and bankruptcy courts will need to contend with the varying interests of the redeveloper/debtor, the lender, the redevelopment entity (i.e., the municipality) and trade creditors which provided materials and services to the project or the redeveloper/debtor.

Bankruptcy may be precipitated by timing or other issues under a redevelopment agreement or by a default under a loan agreement, and a potential debtor may elect to file a bankruptcy proceeding in order to gain the protections afforded by the automatic stay. See, 11 U.S.C. Section 362(a). The application of the automatic stay provides for a statutorily imposed injunction which will serve to stop or suspend litigation, postpone any ongoing foreclosure actions initiated by a lender as a result of a loan default, as well as initiate collection and enforcement proceedings in an effort to permit an orderly process of reorganization through a plan of reorganization to be developed by the redeveloper/debtor.