Two rental properties and exempt home..... Is Ch13 the way to go...?

[realestatee]

We are considering filing chapter 13 because we have 2 other properties, in Florida our own home is exempt. Property #1: rental duplex has 2 mortgages, 1st was just modified at 15% APY for 20 years, second is a HELOC, total about $100K in negative equity. Property#2 is a vacant lot which balloons in 4 months and is also in negative equity.
Is chapter 13 the way to go?

[AngelinaCat]

Hi realestee: welcome to the forum. I moved your question into a thread of it's own so that it will be more easily seen, and you will get more responses.

Good luck to you!

[realestatee]

Reply to thread moving and thank you

Hi realestee: welcome to the forum. I moved your question into a thread of it's own so that it will be more easily seen, and you will get more responses.

Good luck to you!

Thank you, the vacant lot was meant to be our future primary residence actually, not a rental..

[justbroke]

It's time to do a self-assessment and determine if keeping any of the properties is worth it. Simple balance sheet. How much you owe on one side, how much it's worth (FMV) on the other. If the FMV is worth more than what you owe... you have your answer.

However, keeping rental properties or other investment property in a Chapter 13 can be challenging due to the "Chapter 7 liquidation test", which basically means that you need to pay (at least) its value to your unsecured creditors over the life of your plan. Generally, most Chapter 13 debtors don't keep investment/rental properties.

As for your primary residence, same test. If you're more than 10% underwater, you really need to think about whether it makes business sense to waste money.

[VegasBKLwyer]

If you want to keep all three properties than you MUST file Chapter 13. In a Chapter 7 bankruptcy a Debtor can only keep exempt property. In your case, the only exempt property would be your main residence, and as such, your would have to turn the rental properties to the Chapter 7 trustee.

However, since the two rental properties/land are clearly underwater, you should probably surrender both properties in satisfaction of outstanding debt. This can be accomplished under both Chapter 7 and Chapter 13.

Therefore, the issue then becomes what Bankruptcy Chapter you should file knowing that you will be surrendering both rental properties. If you are behind on your main residence mortgage and wish to keep this house than Chapter 13 is the best option. Even though your main residence is exempt, if you are behind on your this mortgage payment you must cure this amount. How this amount is cured varies by which Bankruptcy Chapter you file. Under Chapter 13 you tcure the deficient amounts on this mortgage over three (3) or five (5) years. To the contrary, under Chapter 7 you must cure the entire amount within 30 days of filing bankruptcy.

Other considerations do apply, nonetheless, under these facts, if you are current on your main residence mortgage than file Chapter 7(fyi, you must still qualify for Chapter 7, i.e., have income below your states median family income levels).

If you are not current on your main residence mortgage and wish to keep this house than file Chapter 13.

[Name, address and active links removed as per forum rules.]

I am an attorney but any advice given is not considered legal advice. The Contents of this response is for informational purposes and should not be considered legal advice. This response does not establish an attorney-client relationship.

[realestatee]

Great responses, let me expand though: we make almost three-fold of the Florida median, our credit card debt is around 34k and not behind on anything yet, once the lot loan baloons and surely they will re-write it at an astronomical rate we will not be able to keep up. I read that under chapter 13 we would keep our other properties and pay them back over 5-year period at a fair-market value and that the remainder of the owed balances would go away... is this not true?

[frogger]

In my opinion, if you're that far underwater on the rental property, there is no reason to keep it. It's going to be several years before we see much if any property appreciation again, so by then, you can have your finances improved enough to get some better property for your situation.

Just my opinion.........

[realestatee]

Frogger, I see that you filed an "Asset Case", what does that mean?

[VegasBKLwyer]

For any debt secured by real property you either surrender the property or pay the full contract amount. For all other property (i.e., personal property, with a few exceptions, such as a motor vehicle bought within 910 days of the petition date) you are only required to pay the fair market value of the property over 5 years.

I agree with Frogger, in that you should surrender the investment properties. No reason to keep property that has negative value.

I am an attorney but any advice given is not considered legal advice. The Contents of this response is for informational purposes and should not be considered legal advice. This response does not establish an attorney-client relationship.

[realestatee]

What about the credit card debt, would it be bundled and re-paid over 5 years or kept with the same creditors? With that being said, what is the more beneficial thing to do in terms of interest rates on credit cards: once in ch 13 we don't pay interest, or is that not correct? Also, would be be responsible for paying any of the balances on the properties we would surrender?

[justbroke]

I read that under chapter 13 we would keep our other properties and pay them back over 5-year period at a fair-market value and that the remainder of the owed balances would go away... is this not true?

This is true, but there's more to it than that simple explanation. This other phenomenon is known as the "Chapter 7 liquidation test". That means, that your unsecured creditors must get at least as much as they would had you filed Chapter 7. Since you're over median, you're likely to be in a 5-year plan (unless some other factors come into play, like you have a lot of disposable monthly income (DMI)). Since you're at $43K in unsecured debt, you're probably talking a 100% plan with a DMI of $716.67/month for those 60 months.

On the one hand, should you choose to "bifurcate" (or cramdown) the value of the rentals into their FMV and pay that over the 5 years... you'll have problems because the unsecured portion (or crammed down portion) gets lumped into your unsecured pool. You'll be certainly required to pay the FMV of all the properties, over the 5 years, to the extent that they pay 100% of the unsecured creditors (which now includes the unsecuerd portion of the rentals).

Do you understand? Here's an example. Say you own 5 rental properties each with a FMV of $100K. Let's say that you owe $160K on each. Let's say that you have $60K on other unsecured creditors.

If you were to bifurcate those claims, you'd need to pay 5 x $100K or $500K over 5 years. Let's say that your debt service covers that easily (rent payments). Then, you would also need to pay 100% of the crammed down amount $300K plus the other $60K. That's $360K over 5 years or $6K a month.

See how complex this gets? I'm unsure that you'll be able to do what you want.

[frogger]

Frogger, I see that you filed an "Asset Case", what does that mean?

That means that I had assets that could not be exempted. I did not qualify, nor did I want, a Chapter 13.

[realestatee]

Here's something that our families had asked us to consider: our lot was meant to be our primary residence, which we paid so much more than it is worth now that we will never recoup. However, we are still pressed for space in our current home and its financed at high interest (variable that we froze when rates were going up), so our payments are pretty high for the size of the home. Our credit is still excellent and we our considering putting an offer on another home which will keep our payment the same but will give us more space for the next 10+ years while we survive BK. If we purchase a new home and put our current home on the market prior to filing, would there be a problem when it goes to BK court? Keep in mind that we would file homestead exemption on a new home right away to be effective this year, so that our new home would be exempt. Now, that would add another property that (in case it does not sell) will get surrendered to the lender: 3 properties. Thoughts?