Investment Properties and Chapter 7 Bankruptcy Petitions
Under a Chapter 7 bankruptcy petition, you inform the bankruptcy court that you have only enough income to live on and that servicing all your existing debts is impossible. Under the provisions of the Chapter 7 framework, the bankruptcy court’s trustee has the right to enter any property you own (“step into your shoes”) and to take possession of any assets that are not exempt. These assets are then sold and the funds used to pay off some of your debt.
If these include investment properties with substantial equity, the trustee will seize these for liquidation sale to pay off the creditors. This is despite the fact that those investments are earning an income towards your entire estate.
If you file a Chapter 7, you may not be able to keep the equity in an investment property you own. While the federal government and most states provide you with an exemption for the value of home equity, this exception is for a primary residence only. If you own an investment property and you are expecting the court to discharge your debts in Chapter 7, you may have to turn over the property as it is considered an asset that can be used to pay back the creditors to whom you owe money.
Chapter 13 and Investment Real Estate
As a general matter, although not in every instance, this means that Chapter 13 is often a better option for those who own investment properties.
Under the provisions of a Chapter 13 bankruptcy petition, whether or not you retain that property will depend on two things. First is whether it is at a minimum paying for itself. If the property is netting a loss and that loss is expected to last the three- to five-year period of the bankruptcy, then you will most likely have to sell that investment. This normally occurs in situations where funds were borrowed to purchase the investment and the return is not sufficient to pay back that borrowed money.
If the investment is making a profit, then that profit will be added to your disposable income and used to repay your debts. If you own the investment outright, then you have a better chance of keeping it. If it is real estate, and it is currently not occupied, the trustee may accept this situation; however, you will not be able to spend any money on maintenance or refurbishments (including the mortgage payments).
Keeping Investment Property in Bankruptcy
In some situations, your investments are seen as a positive in bankruptcy so you will be allowed to keep them. In other situations, the investment is seen as a negative and it will need to be disposed of. You need a qualified and experienced Bankruptcy Attorney to help you decide on how to protect those investments.
If you file a Chapter 13, you can keep the investment property, as long as you can afford to pay for it. In some instances, depending on the type of mortgage or mortgage(s) you have and the type of investment property, you may be able to have a mortgage cram down. This means that the value of the loan that you owe can be reduced to the actual value of the property and the remaining balance can be viewed as unsecured debt and thus become part of your Chapter 13 repayment plan.
Under the guidelines of Chapter 13 bankruptcy laws, investment property such as rental houses or apartment buildings is considered separate from your homestead or primary residence. As such you are afforded a unique opportunity to “cram down” these debts to fair market value. A cram down is essentially a readjustment of your principal to reflect the current value of your rental property. As your bankruptcy attorneys, we will need to negotiate the details with the creditors and bankruptcy trustee. Oftentimes, our attorneys know how to utilize the correct approach so that the principal balance can be modified to reflect actual market value.
Our firm wants to help you get the debt relief you need. With the assistance of a Los Angeles, California, bankruptcy lawyer, you can take control of your finances and take the first steps toward a secure financial future. Call our firm at 310-598-7365 or 888-368-4099, or contact us online to schedule a free initial consultation.
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