The Long-Term Risks of Short-Term Mortgages in Chapter 11 Reorganization

Thursday, January 1st, 1987 at 12:00 am by Paul M. Lambert
Paul M. Lambert, The Long-Term Risks of Short-Term Mortgages in Chapter 11 Reorganization, 1987 Colum. Bus. L. Rev. 217

To reduce certain risks associated with lending money and to maintain a high level of liquidity, many commercial, institutional and private venture capital lenders avoid making long-term loan commitments even though the loan could be fully secured by real assets of the debtor such as office buildings, hotels and apartment complexes. Instead, these lenders specialize in making only fully-secured, short-term loans, such as construction and interim loans, in which only a small part of the interest rate charged is designed to compensate the lender for the risk of fluctuations in the prevailing market rate of interest over the short life of the loan. However, even when a short-term loan is fully secured by real estate, a creditor must live with the risk that the debtor will default on the debt, file a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code and obtain the benefits of the automatic stay before the creditor can foreclose on its security interest.

Author Information