Trading exempt asset for non-exempt asset

[Vandervecken]

This may be a crazy question, but my attorney is on vacation this week. We've been going back and forth on Chapter 7 vs. Chapter 13... my numbers were changing as the diivorce settlement was being firmed up.

Apparently I pass the means test, but I have $10k non-exempt equity in a rental house. I need to keep this house; it is near my own house and as my mother gets older, I plan to move her into this house so I can assist her. But I would prefer to stay out of Chapter 13; a Chapter 7 is the cleaner way to start over.

In doing online research, I see that I can redeem personal property in a Chapter 7, but the Nolo website and other sources explicitly say this is not available for real estate. But is this a fixed law, or is it up to the trustee?

For example, I have an IRA that is exempt. Does a trustee have the legal ability to let me cash out part of this IRA and buy back the equity in my rental house?

Thanks!

[justbroke]

You cannot redeem real property since 11 USC 722 reads "redeem tangible personal property" and personal property is not "real" property. The Trustee can't do anything that you can't do; the Trustee "steps into the debtor's shoes" when acting as Trustee. If your IRA allows you to take a "hardship" withdrawal, then that would be specified in the plan document for your IRA. I can not tell you if your particular IRA allows withdrawals for emergencies.

Personally, I would make sure the rental property is worth the effort. If 's underwater by more than 10%, and the real estate in the area isn't improving by 2%+ a year, then maybe you should rethink whether to keep it. Remember, this is purely a financial decision. You have to run the numbers and make a financial decision (the property will appreciate and it's a good investment) rather than an emotional one (I want my aging parents to live there).

I hope that helps.

[LadyInTheRed]

@Vandervecken, I don't think "redemption" is really what you have in mind. Redemption is when you have property that is underwater and you redeem it by paying the creditor its actual value and the balance on the loan is treated as unsecured. What you want to do is buy non exempt equity from the trustee. Whether you can do that depends on whether the trustee is willing to make a deal to sell the non exempt portion of the property to you. I suspect that using your exempt IRA to do that is okay as far as the trustee is concerned, but I doubt you can do it with a hardship withdrawal because I doubt that saving a rental property for the future use of your mother would be considered an immediate financial need which is what is required for hardship. So, unless you are retirement age, you will pay a 10% penalty and income tax on the withdrawal. A Chap 13 sounds like a much better financial decision.

Here's a strategy to discuss with your attorney. File a Chap 7 and hope that the trustee doesn't see enough value in your equity in the property after paying commissions to sell it and abandons it. (The following article suggests a method for determining whether the trustee is likely to abandon the property: https://www.nolo.com/legal-encyclope...tcy-32498.html)
If the trustee does not abandon it, offer to purchase the equity if you really think using your IRA to do that makes sense. If you decide not to purchase the equity or you are unable to reach an agreement with the trustee, convert to a Chap 13.

This will cost more in attorneys fees than simply filing a Chap 13 in the first place.

Another thought: Can your mother offer to buy the equity from the trustee?

[Vandervecken]

Thanks, JB!

If I cannot redeem the real property, then I'm forced into a Chapter 13. Oh well, I'll live...

As far as the rental house, yes there is an emotional aspect to it. It's literally next door to my own house, and with my mother in her 80s, pretty soon she'll have to be where I can help her (drive to doctor, mow yard, etc.) Being able to walk to her (and vice versa) is a pretty significant thing. But it's also a numbers game...

I'll say this: I'll be glad when this divorce is over and the bankruptcy decided.

[Vandervecken]

Thanks, Lady, we posted at the same time!

Your comments are along what I have in mind, I just have my terms wrong. And I had seen the Nolo link, and I'll go back and review it again.

The federal $25k exemption takes care of my primary home almost to the penny. As far as the rental home, there's only $10k in equity, once the mortgage and selling/admin costs are taken into account. And I was not trying for a hardship withdrawal in the IRA, I knew I would have to pay the 10% penalty tax. The numbers come down along these lines:

Chapter 13: monthly payment of $1100 a month for 60 months.

Chapter 7: take $15k from my IRA to buy the equity for $10k (federal/state taxes and penalties eat the rest.)

So at this point, the numbers to me look very much in favor of the chapter 7!

Thanks again!

[justbroke]

As far as the rental home, there's only $10k in equity, once the mortgage and selling/admin costs are taken into account.

The value of the property (and hence the equity) does not include any costs associated with selling the property. You would be purchasing the property back from the Trustee for True Market Value - Encumbrances = Equity, Equity - Exemptions = "liquidation value". As my friend LadyInTheRed wrote, you may be able to put a "distaste" in your Trustee's mouth where they abandon the property because it's not worth the headache, is a strategy.

My only worry is that a.) the equity is more than you think, and b.) the Trustee is "hungry" and up for a challenge.

[LadyInTheRed]

An $1100 payment for 60 months sounds very high to protect a $10,000 asset when you pass the Chap 7 means test. Are you including other things in that payment, or is your disposable income really that high?

[LadyInTheRed]

The value of the property (and hence the equity) does not include any costs associated with selling the property. You would be purchasing the property back from the Trustee for True Market Value - Encumbrances = Equity, Equity - Exemptions = "liquidation value". As my friend LadyInTheRed wrote, you may be able to put a "distaste" in your Trustee's mouth where they abandon the property because it's not worth the headache, is a strategy.

My only worry is that a.) the equity is more than you think, and b.) the Trustee is "hungry" and up for a challenge.

I think a good attorney will negotiate with a trustee to include the expenses of sale in calculations of the buy out amount so that the debtor pays what the unsecured creditors would receive if the trustee were to sell the property. That is what is suggested in the Nolo article I linked to.

I share those worries. If a Chap 7 is filed, there is still the risk that Vandervecken will end up having to convert to a 13 to keep the property.

[Vandervecken]

Yes, my disposable is really that high. I haven't seen the numbers yet for the means test, I think it was the last thing my attorney worked on before leaving for the week. All she sent me was an email stating that with what the property settlement was firming up to be I barely passed the means test, and we needed to talk about whether to try and save the rental house. No other details. And she wanted the final divorce property settlement before committing.

I'm guessing I'm passing the means test because I have to make two car payments (mine and my son's) two high-dollar joint loans. And my mortgage on the primary home is above IRS levels, but the equity in the primary home is exempt.

[justbroke]

Vandervecken It reads as though your lawyer is a keeper and will fight for you.

LadyInTheRed I concur on negotiating, but there are Chapter 7 (panel) Trustees here in central Florida that seem malnourished and are "starving". There are still some Chapter 7 Trustees, in the Middle District, that send appraisers to everyone's home. I don't know if they're lazy or hoping to hit the jackpot. Those same Trustees don't negotiate and tell you to "bid on it at auction". It's a shame, really. (These are the same notorious Trustees that try to get a "carve out" on underwater properties. They must really be hungry. Maybe this is the "New Hunger Games"... apologies to Suzanne Collins.)

Speaking of hunger... it's time for lunch.

[LadyInTheRed]

justbroke, I understand. That IS a shame. I wish the code required the trustee to allow the debtor to purchase non-exempt assets at a value equal to what would go to unsecured creditors if the assets was sold by the trustee.

Have a great lunch!

Vandervecken, if that $1,100 payment does not include payments on secured debt that you would keep have to continue to pay after a Chap 7 discharge, then it very well may make financial sense to use your use your IRA to buy the non-exempt equity. I agree that it sounds like you have a good attorney. I bet she will give you a clear overview of your options and make a recommendation.

[Vandervecken]

Thank you everybody!!!