After making headlines for leaving home buyers with unfinished homes, homebuilder J&R Homes officially filed for Chapter 7 bankruptcy and surrendered its contractors’ license earlier this week.
With large amounts of debt and little in the way of assets, J&R’s bankruptcy may come as a frustration to their many contractors, many of whom have not yet been paid for work.
Many of the contractors in this situation have since filed mechanics liens, which place a security interest on a home or property and make it difficult for an owner to sell the property without first paying the lien claim.
Unfortunately, dozens of J&R Homes homeowners are now saddled with tens of thousands in construction liens and loans — and almost no complete homes to show for it. Options for recovering payment in this situation are unclear — although contractors have done the right thing by using liens to secure the rights to payment, homeowners have also been victimized in this situation and may have little money to offer.
Many of J&R Homes’ customers were already wary of the situation: After signing contracts and paying deposits to J&R Homes for custom-built houses, many customers reported that it took months for work to begin. The homebuilder eventually made it as far as framing the homes, but then allegedly vanished entirely.
Contractors claimed to have not been paid by J&R Homes, and had filed liens on the homes in question worth thousands of dollars. J&R Homes made local news when homeowners began to publicly express their frustration with the homebuilder, who reportedly stopped responding entirely to correspondence.
Customers were worried that J&R Homes would attempt to file bankruptcy, leaving recent home-buyers with unfinished houses, thousands in property liens, and even more in construction loans.
Just days later, this is exactly what happened. J&R Homes filed for Chapter 7 bankruptcy on May 10. With creditors numbering somewhere between 100-199, it’s clear J&R Homes folded under significant financial pressures.
Bankruptcy documents reveal that with assets of less than $100,000, J&R Homes owed between $1-10 million to a large number of contractors, suppliers, and lessors. Filings also reveal 59 different ongoing construction contracts that have yet to be completed.
J&R Homes’ failure leaves both homeowners and contractors in an uncomfortable position. While lien rights should protect contractors’ rights to be paid, J&R Homes’ customers have also had the rug pulled on them.
After dealing with existing construction loans — as high as $80,000 in one couple’s case — and future construction costs and repairs, it’s not clear how much contractors will be able to recover from the affected property owners.
Such a situation highlights the importance of property owners, contractors, and subcontractors prequalifying who they work with.
“One bad egg could affect the project schedule, the quality of performance, project safety, and it could even determine whether payment disputes will occur,” says construction attorney Alex Benarroche. “Establishing a prequalification process can help contractors, subs, and suppliers minimizes risk.”
J&R Homes’ bankruptcy is a major stumbling block for all parties. Chapter 7 bankruptcy typically means a business is liquidating its assets, and while J&R Homes’ bankruptcy filings reveal limited assets, it’s possible the homebuilder will be able to pay off some of its creditors and alleviate pressure.
The homes started by J&R aren’t the only ones unfinished: Home prices are up, and in recent years homebuilders have found themselves caught between a red-hot buyers market and a substantial materials shortage.
Booming demand for new homes has resulted in many houses being sold unfinished. While some may simply be missing elements like gutters or a garage door, others — such as those sold recently by J&R Homes — are completely uninhabitable.
Read more: Homes Left Unfinished as Contractors Are Squeezed by Material Shortages