Hotel Chapter 11: 6 Issues That Make a Hotel Bankruptcy Different

Ordinary businesses often get financing on their property or equipment, and repay it from the profits they make. But a hotel is both property and business - and the rooms are rented out every night. The rent money covers the mortgage, and the salaries. That makes a hotel very different from an ordinary business, in bankruptcy.

For a hotel bankruptcy there are six special issues to think about. The lender may have a lien on the room revenue, the property may count as ‘single asset real estate,’ you might use Subchapter V, you need to think about franchise agreements and the ground lease or management contract. There are strict deadlines, too, with extra cost.

Cash Collateral

Here’s how this one works. In the days or weeks after filing, your guests keep on paying for their rooms. If you borrowed money on the hotel, the lender’s loan papers might let it claim that money after filing. Those payments are ”cash collateral” under the Code. The lender’s lien doesn’t always cover all the revenue. The court can limit the lender’s reach, based on the equities of the case.

You can’t use cash collateral freely. You can’t keep paying salaries and the electric bill and repairs, unless the lender agrees to that, or the court orders it. Deposit the money in an account separate from the other assets of the estate. This can be a real burden. Using cash collateral without permission is a big risk. Your court could dismiss the case altogether or even convert it to Chapter 7, if the lender persuades the judge that you didn’t treat it right.

Single Asset Real Estate

One thing that makes hotels and motels special, is that the property itself is the business. If your hotel earns almost all its income from its rooms, and doesn’t have any other substantial business, that could count as ’single asset real estate,’ with harsh results. Why? Because if you’re a single asset, and you file for bankruptcy, the rules are different.

If so, a hotel lender can move to lift the automatic stay, unless you file a plan likely to be confirmed or start paying monthly interest at the non-default contract rate within 90 days. The court can extend the deadline, if you have a good reason. If the parties don’t agree about whether your business counts as single asset real estate, the court might not rule on that for a while. That could postpone the deadline for filing a plan, to thirty days after the court’s ruling.

You don’t even have to be open to count as single asset real estate. In re Source Hotel (C.D. Cal. 2022) was a hotel that was under construction but not open for business. It had no rent or income at all, but the court ruled that it was still single asset real estate.

Depending on your business and the property, you might not even be single asset real estate. In re ENKOGS1 (2021) ruled that a 79-room hotel, with a 24-hour front desk and breakfast and pool and housekeeping, wasn’t single asset real estate. If your hotel is like that, maybe you’re not one, either. Subchapter V gives smaller businesses a streamlined and flexible procedure, that isn’t available to single asset real estate. You might be able to use it. Your debt can’t be more than $3,424,000 for cases filed since June 21, 2024. You’ve only got 90 days to file your plan, and extensions are hard to get.

Assume or Reject Your Franchise Agreement

Think about your franchise agreement. It may be important to your business. That’s the contract with the franchisor that lets you market rooms under the franchisor’s name. You get to assume or reject your franchise agreement at any time until the court confirms a plan, unless it sets an earlier deadline.

Some owners don’t want to stay in the franchise. That’s fine: you don’t have to be stuck with an agreement that doesn’t work for you. You do need to plan ahead, because if you reject it, that gets treated as a breach of contract the moment before the bankruptcy case starts. The franchisor gets a claim for the damages it says it suffered. One important case about franchising was In re Welcome Group 2 (Bankr. S.D. Ohio 2025). The owner of a Hampton Inn wanted to keep its Hilton franchise, even though the PIP renovations were overdue. And it got it, even over Hilton’s protest, because the court ruled that the missed deadlines weren’t a material default.

You might also have a management agreement. That’s an outside company running your hotel for you. You can assume it or reject it at any time before the court confirms a plan.

The ground lease - the lease of the land your hotel is on - is an important contract, and you need to plan on it. You need to either assume or reject it. The time limits are tight. You’ve got 120 days to make up your mind, from the day you file the case. You can get an extension of time if there’s a good reason for it, but it’s only good for 90 days more unless the landlord consents in writing. If you wait too long, the lease is automatically rejected, whether you want to or not.

Now, let’s talk about time and cost. First, the time. In a standard Chapter 11, only you may file a plan for the first 120 days. The court can extend that, but not to more than 18 months. How much will it all cost? You’ll pay court filing fees of $1,738: the $1,167 filing fee plus the $571 administrative fee.

Right before you file, ask some questions. Do your loan papers give the lender the right to the revenue from renting out the rooms? Do you need its consent to keep on spending the room income? Have you figured out yet whether you’re single asset real estate? Will you keep your franchise agreement? If you have a management company or a ground lease, you need to decide what to do about that. Decide early.