Following a ten-year effort by the many industries, including the manufactured housing industry, bankruptcy reform was signed into law by President Bush on April 14. Among the new provisions in the law is one long-sought by the MHI National Communities Council: relief from the current automatic stay provisions. Other aspects beneficial to the industry are less burdensome requirements for creditors to keep payments submitted by bankrupt companies and the elimination of lender “cram-downs” for personal property loans.

The NCC and its industry allies were successful in its efforts to pass the exception to the automatic stay provision that will allow rental housing providers, including manufactured housing community owners, to recover their property for non-payment of rent, property endangerment, or illegal drug activity where a judgment of possession has been obtained against a resident before he/she/they file for bankruptcy protection. Community residents will no longer be able to avoid rental obligations and eviction, as they currently do, by filing for bankruptcy. This should assist community owners in recovering possession of their property much more quickly.

When a company files for bankruptcy today, the court appointed trustee may demand repayment of all monies paid to creditors within 90 days prior to the bankruptcy filing. This provision was intended to address the so-called “brother-in-law payment” situation. To keep these funds, creditors must go to court where bankruptcy judges often consider how long the parties have been doing business; how long the invoice was outstanding before it was paid; and whether the creditor submitted the invoice in a timely manner. Many creditors cannot sustain their claims because for example they may be a relatively new supplier or may have submitted their invoices late. The new law will make it easier for creditors to keep their funds if they can show the funds were paid according to ordinary business terms and that there were no preferential terms in the transaction.

With regard to the cram-down provision, bankruptcy judges currently have the authority to reduce the amount of indebtedness owed from the outstanding loan balance down to the fair market value of the asset in question. For chattel lenders, this has meant that the owner of a manufactured home (titled as personal property) that has depreciated can declare bankruptcy and ask the court to “cram-down” the amount owed to the home’s fair market value—regardless of the outstanding loan balance. The new law specifically states that loan cram-downs will no longer be allowable for motor vehicles and for condominiums, cooperatives, and a “mobile or manufactured home, or trailer.”

If you are an NCC member with questions about the new law, contact Brian Cooney at 703-558-0660 or brian@mfghome.org.