People file for bankruptcy for many different reasons in California, under many different circumstances. In some instances, the trustee and court will review a bankruptcy with more scrutiny because the debtor has additional real estate besides their home. If you own investment or rental properties, it might be challenging to protect them in bankruptcy. The Bankruptcy Group wants our clients to be aware of the complications associated with a rental property. Below, our Roseville bankruptcy attorney provides information to understand how rental properties are treated in bankruptcy.
Chapter 7 Bankruptcies and Rental Properties in California
Chapter 7 bankruptcies are designed for people who are unable to pay their debts. A debtor is asserting to the Bankruptcy Court that they have just enough money to pay their basic necessities. When you file for Chapter 7, it is possible that your property will be liquidated or sold, and the proceeds distributed among your creditors. Under California state law, you are entitled to protect a portion of your assets from being sold. However, real estate with significant equity, even if those properties are generating income for you, might not be exempt from sale.
While there are exemptions to protect your primary residency, they do not apply to investment property. Because your rental property will not be exempt, it is available to the trustee to sell and use the proceeds to satisfy a portion of your debt.
However, the trustee will only take nonexempt real estate if the proceeds from a sale will exceed the expense of selling the property. If a debtor has little to no equity in their investment property, the trustee might decide that it is not worth selling. This is because the mortgage holder is entitled to the proceeds from the sale, leaving nothing for the other creditors. In some cases, if a rental property is costing you more to maintain than it is generating income, the trustee will not allow you to retain the property despite its equity. It is essential to disclose all of your rental property to our Sacramento bankruptcy attorney before you file.
Chapter 7 and the “Wildcard” Exemption for Rental Properties in California
Debtors in California must choose between two sets of state exemptions when they file for bankruptcy. Under the California Code of Civil Procedure § 703.140(b)(5), debtors are entitled to a “wildcard” exemption that they could use for any property they own. Depending on the equity in their residence, this amount could range from $1,550 to $32,375. While this might appear to be significant, the amount available for a rental property will depend on the equity in the debtor’s residence and other property that they want to protect. Our California bankruptcy attorney will thoroughly review your assets and the available exemptions before a case is filed.
Rental Properties and Chapter 13 Bankruptcy in California
If you own rental properties that generate income, then filing for Chapter 13 might be the best way to keep your real estate. Unlike a Chapter 7, you are not required to give up any of your property or assets in Chapter 13. However, that does not mean that you can hold onto everything without consequences. In Chapter 13, you will have to pay back a portion or all to your creditors over a three to five-year bankruptcy plan. The amount you must pay is directly linked to the value of nonexempt equity in your property. For example, if you have $15,000 in nonexempt equity in a rental property and $30,000 worth of unsecured debt, you would be required to pay your creditors $15,000. This example is simplified, and it is crucial to review your assets, income, and liabilities with our California Chapter 13 bankruptcy attorney before filing.
Benefits of Filing for Chapter 13 When You Have Rental Properties
However, there are some benefits to filing for Chapter 13 when you have rental properties. If you are behind on your mortgage payments on a rental property, you are entitled to include any mortgage arrears in your bankruptcy plan and pay it back over the next three to five years. If you can afford the payment, along with any other debt you must pay, you will be able to protect your rental property from eventual foreclosure.
Another benefit available in Chapter 13 is the ability to “cram down” your mortgage on your investment property. Under certain circumstances, you could be able to reduce the amount you owe on the mortgage to the value of the property as of the date you filed your bankruptcy. For instance, if you owe $350,000 on a rental property that is currently worth $200,00, you could reduce your debt by $150,000.
Unfortunately, this sounds much better than it is in reality. There is a significant catch. You must be able to pay the full reduced amount during your bankruptcy. Therefore, if you reduce your mortgage down to $200,000, you must pay it, along with any other debts you are required to pay within the five years. For many people, paying that amount in such a short period will be impossible. However, if you can manage the payment, you could save yourself a substantial amount of money while keeping your rental property. Our California Chapter 13 bankruptcy attorney will review all your options with you.
Call Our California Bankruptcy Attorney to Discuss Your Rental Property
People have many questions and concerns before they decide to file for bankruptcy. In the case of investment properties, debtors in California want to know if they can keep their rentals. Unfortunately, the answer is, “it depends.” Every case is unique and whether or not a debtor can keep their property depends on their circumstances. Our experienced attorney will answer all your bankruptcy questions. Call The Bankruptcy Group at 1-800-920-5351 to schedule a free consultation to discuss your investment properties.