Photos: Jon Krause

The adage “he who hesitates is lost” could be this year’s bumper sticker for the growing legion of distressed builders wondering if they can save their companies through bankruptcy protection.

A housing industry well into its fourth year of a downturn and second year of economic recession is littered with builders who waited too long to address problems that ultimately rendered their companies insolvent. “By the time they get to Chapter 11, most builders are already at the liquidating stage,” observes Becky Roof, a director with AlixPartners, a New York–based firm whose bankrupt clients include Kimball Hill Homes and Caruso Homes.

As 2008 ground to its ignominious conclusion, untold scores of builders had liquidated their assets and closed their doors without filing bankruptcy. And Chapter 11 hasn’t exactly been a path to operational viability for builders that have tried it. Still, a handful are using bankruptcy protection to wind down businesses or to restructure debt, pay creditors, reorganize, and—they hope—start building homes again.

Unfortunately, absent sufficient liquidity or an end-game strategy going in, builders will experience Chapter 11 as a costly exercise in futility, say experts, especially if lenders continue to play hardball about renegotiating debt and financing the completion of projects.

Not For Everyone

The end game for one regional builder, which fell out of compliance with a loan covenant in January, could be a steep ramp down of its operations. The builder wants lenders to adjust the terms of its loan by ­accepting writeoffs, equity, or convertible debt. If the lenders balk, the builder might say “here are the keys,” says Harold Bordwin, managing director with KPMG ­Corporate Finance, the New York–based consulting firm that’s working with the builder. There’s general agreement among experts that builders who haven’t personally guaranteed their companies’ debt have greater leverage with creditors.

Only a minuscule number of distressed builders ever file, says Jim Weigel of Shinn Consulting, which in early December presented a webinar on bankruptcy to which more than 50 builders listened. “For builders, Chapter 11 is not impossible, but it’s risky and has led to a loss in value,” adds Natasha Labovitz, restructuring partner with the law firm Kirkland & Ellis, which represents several bankrupt builders including TOUSA. She urges clients to talk first to creditors about out-of-court restructuring. The threat of filing, she says, can be effective to gain creditors’ cooperation.

Learn more about markets featured in this article: Phoenix, AZ.