Are tenants notified if I file C-13?

[Slingerland]

This is based on another thread in the Chapter 7 forum...

I have rental properties that I am keeping in my upcoming Chapter 13 bankruptcy. I operate the properties through a LLC, not under my name. The LLC has its own TIN and its own legal existence (although I guaranteed the mortgages under my credit of course.)

So my question... the tenants leases are through "Drummer Properties", not through me. "Drummer Properties" is not filing bankruptcy. Will the court notify the tenants that I am filing?

My worry is the tenants will stop payting rent (or bail out completely) leaving me without the cashflow to keep the properties.

Thanks!

[justbroke]

You need to either ASSUME or REJECT the leases in the Bankruptcy. Be very careful about single-member LLCs and even partnerships under an LLC. The Trustee does in fact step into the shoes of the debtor and is an attorney-in-fact over any property of the debtor! I hope that you have a.) taken a very serious look at whether the finances of keeping the properties is worth it, and b.) reviewed this with an attorney so that you understand the reach of the Chapter 13 Trustee.

At my confirmation hearing, I asked the court to specifically allow me to continue collecting rents and to transfer those rents to the Trustee. I only did this because I wanted to pay this outside a Wage Deduction Order and because I was having tenant issues anyhow. The Trustee needed the money to pay the mortgage(s) but wasn't interested in being landlord. So, I did the stupid thing, kept the properties and tried to be landlord. Big mistake. I converted to Chapter 7 and discharged the properties.

Again, rather than trying to keep the properties, think really hard about where you are with the properties (over/under), what would happen if you lost the tenants yesterday, and where you want to be at the end of the Chapter 13. I gave up on the real estate mogul dream (having owned a multi-unit building with more than 60 units and both multi-family and single family homes).

Worrying about the tenants is exactly the thing that should make you second guess even keeping the properties.

[Slingerland]

Thanks, JB... during my attorney consultation, we discussed this. The trustee here will not want to have anything to do with the rental company, and based on previous landlord bankruptcies, will not want the rental mortgage payments within the plan. According to my attorney, the company will still be mine to run as I have been doing.

The properties are upside down on equity, but cash flow well. It's the other debt in my life that is killing me. I want to keep the properties for many reasons, but the fact is they are profitable. Turning the properties over to the trustee for sale will pull my wife into the bankruptcy, and that has to be avoided at all costs.

[frogger]

The properties are upside down on equity, but cash flow well. It's the other debt in my life that is killing me. I want to keep the properties for many reasons, but the fact is they are profitable. Turning the properties over to the trustee for sale will pull my wife into the bankruptcy, and that has to be avoided at all costs.

So your filing bk, and are still going to be upside down when finished? Cash flow is only an illusion that can send your financial life spiraling down the drain.

Cash flow and profitability are two separate things. Cash flow may be great today, but what happens when you have a rash of vacancies, damages, repairs, upgrades, etc. that all happen at once?

Don't think that it can't/won't happen, because it does.

As to avoid pulling the wife into bk at all costs, that is a scary way to think of things. When you think like that, rational behavior and reasoning for your personal financial business is skewed.

Good luck.

[despritfreya]

Since the leases are in the name of the LLC you do not have to assume them and they are not listed on Schedule G. As your attorney indicated, you will continue to run the business as before. However, as JB and Frogger alluded to, eventually you will begin dumping the properties. It will take you time to realize what the rest of us already know, keeping upside-down properties is a waste of time and energy.

Des.

[Slingerland]

Thank you everybody... but with a great deal of respect, may I point out that "should I dump the houses" was not the question?

While I realize that many people got in over their heads with their rental investments, I have been doing rentals for years, and my situation is under control. I have not posted the degree to which the houses are upside down on equity nor the actual cash flow numbers. The houses are only a few percent under, and that is only due to the hypothetical trustee fee and agents' fee if the houses were sold by the court. If I sold them myself, I would clear out the mortgages. But by being upside down (on paper) I do not have to include their equity in the calculations on the amount I have to pay back to unsecured creditors

The positive cash flow is well over 35% per month... averaging $300 net profit per house per month. I know the market here, I know the rent levels, and I see where rent will be going in the next 2 years. I also know the condition of the houses, what is likely to break, what is under warranty.

Believe me I understand about repairs, having jackhammered up a sewer line last year and replacing a HVAC this year. I understand about vandalism, too. But these are not slum shacks in Detroit, or condos in Florida. Left alone, the rental houses cover their expenses, plus a decent profit.

My problem is with unsecured debt incurred due to my wife's cancer (along with her expensive tastes... sigh...) The payments have grown to the point that I needed the rental profits combined with my salary to make the payments. Many years ago I carefully firewalled the three of us (her, me, rental company) apart financially in case a tenant sued me. Now it looks like the firewall will help for a C-13 as well. (If you're curious, my attorney strongly believes the income from the houses will be left alone by the trustee for at least two years, possibly three.)

By filing bankruptcy individually, I "take the knife" but I also absorb my wife's medical issues, her secured car payment and credit card debt. Her financial house is intact and undamaged, allowing her to pay off her other bills. The rental company is intact and undamaged, and becomes the source for emergency savings. I personally take the knife, but as the leader of the family, shouldn't I do that for her?

With respect, my original issue was this: the tenants do not sign leases with me, they signed with my rental company. The rental company is totally separate financially (TIN, etc.) and is not filing bankruptcy. Therefore, my understanding is that the court should not contact the tenants. I thought I would ask here first, as my attorney was on a week's vacation.

Again, I deeply appreciate everybody's input here.

[Slingerland]

Despritfreya, I just saw your response. Thank you VERY much! And hopefully the numbers above will help everybody understand why I am keeping these properties.

[despritfreya]

my original issue was this: the tenants do not sign leases with *me*, they signed with my *rental company*. The rental company is totally separate financially (TIN, etc.) and is not filing bankruptcy. Therefore, my understanding is that the court should not contact the tenants. I thought I would ask here first, as my attorney was on a week's vacation.

The Court will not contact the tenants. However, the Trustee, needing to know that the properties are leased and generating revenues, in his duty to investigate, may want copies of the leases. In the past I have redacted the last name of each tenant due to privacy concerns. I have never had a problem with this approach.

As it relates to your comfort level in the revenues generated, be careful. Your tenants are having as much financial difficulties as you are. If and when they default the positive cash flow, as you know, will be lost until you are able to evict, clean up and re-rent. The current cash flow is what is going to help you fund your Plan. When the properties start costing you money you will have no alternative but to dump one or two or all. In the years since the "crash" not one of my clients who operates as a landlord has kept all properties. But. . . all start out wanting to. Just the nature of the beast that is today's economic reality.

Des.

[Slingerland]

I hear what you're saying desprit... and careful is the name of the game. Under current cashflow, I can have 1/3 of the houses empty and still break even. My tenants stay an average of 4 years, and the properties are vacant an average of 2 months. The neighborhoods are safe and secure, and very much in demand. Total vacancy/repair expenses have run at about 9% for 6 years without much change (industry average is 25%.)

Remember the rental cash flow will actually not be in the plan, although the trustee may want profit/loss statements each year. I have day employment that will be what the plan is based on. According to my attorney, one possible trustee understands about keeping realistic repair/vacancy reserves and will be reasonable in requesting any disbursements from the rentals. The other trustee doesn't want to see it and will accept a five year projection.

But like you say... if worst comes to worst I know which houses to give up and which ones to keep.

Thanks again, everybody!

[justbroke]

Slinger, you are amongst the first of the landlords to have carefully evaluated their situation prior to filing bankruptcy. It's refreshing to read that you understand and have done the math. Without the subsequent data that you provided, I would have continued to instruct you to "do the math" and understand what the long-term goal is.

The kicker is that this is income for purposes of your plan and, if you have included these mortgages on Line 42 of your Form B22C, the Trustee will be very interested in the receipts. While the Trustee doesn't want anything to do with the mortgages or the rental income, the income itself (after taking care of the mortgages, taxes, insurance and other costs), may be "interesting" to the Trustee.

Your attorney is also very smart. Most financial analysts will only allow about 75% (or 0.75) of the total annual receipts from the rental property to be counted for purposes of income. This allows for vacancies and general repairs. The fact that you are running 1.3:1 for your debt service ratio, is pretty good. I like to see them over 1.2:1 since this means you have that cushion. If you have been running at that level for years, and have projected future maintenance and upkeep activities (exterior painting, sewer backup/septic backup, heating/ventilation systems, etc) into the numbers, then you are a "real" landlord.

I would still, if possible, discharge the mortgages and do a "pay and stay" (retain and pay) on those properties. This way, you have no legal issues should the unexpected happen, such as loss of revenue beyond your break-even-point or lawsuit.

My Trustee never contacted my tenants. I did provide leases, but I didn't redact the names as did Desprit (which is good advice since it may end up in the public record).

[Slingerland]

Thanks, JB! It's all a matter of timing.

I plan to file C-13 in late October/early November. The attorney is balancing out the income, expenses and mortgage debt in the B22A, Sched I/J and 22C in such a fashion as the last 6 months will include both the annual property taxes (due Oct 1) on all properties, and a HVAC I had to replace last week (late June). The profits from Dec-Apr are not included in the average. In other words, the "last 6 months" will show a bare breakeven...

Then we will provide a future projection showing the 75% allowance for vacancy/repair, along with the time needed to build the repair reserve back to where it can handle major repairs again. We'll list the age of the houses, roofs, HVACs, etc to support the 75% repair/vacancy. We'll show that my reserve is too low and needs to be built back up (the repair reserve is low now, because I've been using the profits to pay my wife's medical payments.)

With these numbers, our projection will show at least two years to rebuild the reserves, more likely three. (But over the past 10 years, my real-world repair/vacancy allowance has been 89%... I'll be building up faster than scheduled barring any disasters...)

FYI, in case of a REAL emergency in the interim, my state's laws allow me to "borrow" the security deposits for repairs, provided the deposits get returned to the tenant as the law allows (60 days after move-out.) Arkansas doesn't require separate interest-bearing accounts as some states do, I can pool the deposits into ordinary accounts provided that I can account for the money. Right now I do have a separate account for deposits and escrow items, and it's easy to demonstrate that to the trustee.

The rental houses are my plan to retire... I trust them more than a 401(k) So the objective here is to keep 'em, and keep 'em out of the C-13 plan!

[justbroke]

Again, you have certainly thought this through and you are, in my mind, well prepared! It's all about the numbers. It also reads as though your attorney is familiar with business filings and that is refreshing as well. Are you sure that you'll be in a Chapter 13 and not a Chapter 11? It reads as though you have multiple properties and some even multi-tenant (multi-unit). This may put you over the debt limits (11 USC 109(e)). Just wondering!

[Slingerland]

I've had a good attorney... he's also a major landlord. Also I downlaoded the Best Case software and spent a number of hours experimenting with it.

Yes, I'll be in a C-13. I only have single family houses, I was moving up into the multis when the banking system fell apart (sigh). I'm under the debt limits, and since I have a day job, the means test shows I must make payments. And while these are good, blue collar and white collar houses, housing in Arkansas is MUCH cheaper than say, California or Florida. A good house in a good neighborhood here can run for $50~75 a sq ft.

You're absolutely right about numbers and strategic planning. I'm doing nothing illegal, just making sure I dont do anything stupid... in the bankruptcy, anyway Right now it looks like a 27% unsecured payout, 60 months. If the trustee puts my student loan on deferment, it will be a 41% secured payout. Liquidation would be 7%.

Trivia: at one point I had 18 properties... in 2008 I sold off 10 to fund buying an historic 8-plex in an area that was very high dollar. I was buying it WAY below value as the owner had died, and the property had been tied up in estate. I had a $100k line of credit ready to rehab the building (it was empty, needed work!) Once finished and rented, the rents (law school kids, yuppies, etc) would have a 1.6:1 cash to debt ratio.

The Friday we were supposed to close, the deceased owner's daughter got blindingly drunk and didn't show. We rescheduled for the next Tuesday so she could sober up. Over the weekend, Lehman Brothers failed... and Monday monring the bank pulled the line of credit. Without the line, no way I could rehab the building, and I had to let it go.

The building is still vacant now. It would have been a fantastic project...