CEO Tony Mon's decision to file for bankruptcy protection for TOUSA's home building subsidiaries is an event of consequence for an industry battling a vicious housing recession. TOUSA is hardly the first of the downturn's casualties–the market has already claimed builders such as Levitt & Son, Kara Homes, Neumann Homes, and Trend Homes–but it is the largest one to date. And whether it will be able to reorganize efficiently enough to emerge from insolvency as a stronger company will go far in predicting how resilient the industry will be as a whole when the market finally hits an inflection point.

Management at NVR has proven it can be done. Following a bankruptcy filing in the 1990s, the company clawed its way back to become the best performing public builder in the industry today. But whether TOUSA management can do the same remains to be seen.

The company's finance and operational teams, in particular, are under pressure and in flux. Most recently, CFO and EVP Stephen Wagman resigned roughly two weeks before the official bankruptcy filing on Jan. 31; TOUSA veteran Tommy McAden stepped back into his former CFO role after serving as EVP and director.

The company's Chapter 11 announcement follows two defaults on interest payments in January on a collective $685 million in senior and senior subordinated notes. Consequently, TOUSA's post-bankruptcy reorganization plan includes exchanging senior bond debt for equity in the restructured company. The equity deal would provide the note holders with virtually all of the revamped company's stock as well as an interest in and potential proceeds from a litigation trust.

The plan also involves $135 million in debtor-in-possession financing from Citigroup Global Markets to keep day-to-day operations afloat. However, following the financing's tentative approval by Judge John K. Olson of the U.S. Bankruptcy Court's Fort Lauderdale division, a group of 10 creditors including both senior and senior subordinated note holders filed an objection with the court, claiming that emergency financing is unnecessary.

Moreover, the group accuses the company of fraudulent conveyance in July, when the executive team brought the whole of its beleaguered Transeastern Homes joint venture onto TOUSA's balance sheet. The creditor group argues that TOUSA's home building subsidiaries–TOUSA Homes, Newmark Homes, and related brands–secured the parent company's $506.8 million in loans to buy out the 2005 JV debt with liens on their properties, a move that unnecessarily drove them to insolvency as the housing market deteriorated.

While the court sorts out the details of the restructuring plan, company spokesperson Jennifer Mercer says stakeholders will suffer little in the interim. "There will be absolutely no change in the normal course of business," she says. "Homes will be built; homes will be sold; employees will be paid. Customers can expect no interruption."

To minimize negative fallout from the announcement, divisions sent out e-mails to reassure home buyers in backlog. A note from the Orlando division acknowledges, "This news may be disturbing, but [we] want to assure that Engle Homes is not going out of business." As an added incentive not to cancel, buyers in backlog as well as those who sign a sales contract before April 30 will receive a free-of-charge, 10-year transferable supplemental home warranty with insurer Zurich North America.

Regardless of corporate measures to smooth things out, individual divisions ultimately will have to muscle through the situation, a sizeable challenge now that the company's experienced regional management structure has been eliminated.

And if the market gets worse before it gets better, as many industry experts expect, management's expectation that TOUSA will emerge from this crisis a stronger company could be in jeopardy. According to data from Raymond James & Associates, the company is highly exposed in some of the most troubled markets. The Phoenix market accounts for 28 percent of the company's total closings while Florida operations contribute to 27 percent of all closings.

–Sarah Yaussi