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The number of bankruptcy cases in the last few years has risen substantially, which has led many people to consider bankruptcy as a method of taking control of debts. While the COVID-19 pandemic impacted countless workers, hotel owners and workers have been some of the most negatively impacted. This is because occupancy rates at hotels decreased sharply in 2020.
Among the options for pursuing bankruptcy, Subchapter V is not available for debtors who only own one property. Based on a recent bankruptcy decision from a Florida court, hotel owners are not single asset real debtors because they provide services beyond renting rooms and consequently can pursue Subchapter V. This decision will likely lead to an increase in the number of debtors who are capable of pursuing Subchapter V to take control of debts.
How the Case Arose
The case involved a disagreement between an Econo Lodge Inn & Suites and the State Bank of Texas, which functioned as the hotel’s primary creditor. The bank tried to prevent the Econo Lodge from pursuing Subchapter V.
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How Bankruptcy Law Applied to the Case
Under the bankruptcy code, single asset real estate includes real property that meets several requirements like:
The court found that besides owning property, the debtor employed 15 people at the property, cleaned the property daily, provided breakfast, had a pool and fitness center onsite, and provided additional services. The court determined that these services went past operating property and associated activities.
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The Bankruptcy Court’s Decision
In reaching its decision, the court compared the differences with apartment buildings where leases are signed and little additional assistance is required, to hotels that often involve substantially more daily activities like preparing for guests, cleaning after guests leave, and providing guests with necessary amenities during their stay. Ultimately, the court found that if these additional services do not generate additional income, they can remove a hotel from the single asset real estate category.
How the Case Applies to Others
The lesson of this case is that according to at least bankruptcy courts, hotel owners and associates pursuing bankruptcy can consider filing under the more debtor-friendly Subchapter V. The Florida bankruptcy court’s decision will likely prove persuasive in other Subchapter V decisions and could lead to an increase in the number of business owners who pursue bankruptcy under this method. Financial institutes as well as other tourism related creditors would do well to remember this case during bankruptcy negotiations.
A Quick Guide to Navigating Subchapter V
For small businesses, pursuing bankruptcy can be a costly and time-intensive process. Subchapter V, however, helps some companies escape debt. No two bankruptcy cases are the same, however, and you need to be sure to plan properly if you are pursuing Subchapter V. Here are some important details to consider about the bankruptcy process:
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Speak With an Experienced Bankruptcy Attorney
If you have questions or concerns about the bankruptcy process, one of the best things that you can do is to contact a knowledgeable lawyer. Schedule a free case evaluation with attorney Melanie Tavare today.
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