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Chapter 7 and Rental Property in Texas

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  • Chapter 7 and Rental Property in Texas

    I am considering filing for Chapter 7. I actually filed back in 2004 and now this will be my second time. Here is my situation. We lived in the same house (our first home ever) from 2002 until last year when we moved, buying another home of similar value and in the same area. The new home has more space and a pool and we got attached from the first time seeing it. We kept the first house and now lease it out in hopes of it being an investment tool for our future retirement. Here is a break down of our debts:

    Rental Home: Valued at $250k and owe approx $140k plus owe another $15k for a HELOC on it. Total mortgage and escrow payment is $1250 plus $210 for HELOC payment
    Current Home: Valued at $275k and owe $256k. Total mortgage and escrow payment is $2050
    Total credit card debt of $65k
    Honda van: $23k. Monthly payment is $425
    Ford Truck: $11k. Monthly payment is $210

    The rental house brings in $1600 a month income

    We have thought about selling the newer house and moving back into the rental home and trying to tackle the debt but it feels insurmountable. The other option is to sell the rental house and pay all the debt off we can and then tackle the rest (which would still be substantial after real estate fees and paying HELOC off as well). The problem is the older house is small, and we moved because our three kids are getting older and bigger and we need the space. Another issue that makes BOTH decisions harder is that the renters signed a 2 year lease and will be in the rental for another year so we have to wait for them to leave before either can be done.

    We are in this position again due to poor decisions and bad luck. We've had unexpected expenses such as sharing the cost of assisted living for my mother and repairs and renovations on the rental property. Along with that, we have lived on fast food and eating out. Always on the run with kids sports, band, scouts, etc, we have wasted money more than I care to say. We were able to put the down payment on the new home only after my mothers passing and small inheritance (the total went on paying off some debt and putting $20k on the down payment).

    All that being said, my main questions pertain to rental property. Can we keep the rental property and exempt the equity if we don't live in it? I know there are rules about equity, but it usually pertains to while you live in the property. If we can't, we could move back into the old house and then file, selling the newer house and HOPEFULLY breaking even after real estate fees. Any thoughts? I have thick skin so say what you want to say how you want to say it as long as it helps my understanding of our situation. Thanks.

  • #2
    Bueller...Bueller...Bueller...anyone here? Not a single comment yet.


    • #3
      is that the renters signed a 2 year lease and will be in the rental for another year so we have to wait for them to leave before either can be done.
      You can reject any lease in a bankruptcy, but the question will be whether the home is considered your homestead (for purposes of protecting equity!). You simply can't claim homestead on a property that you don't occupy (a homestead is your primary residence).

      Why don't you just sell the rental and payoff your creditors? If you file Chapter 7, that is what's going to happen anyhow. If you file Chapter 13, you would still need to pay the value of the equity, so you're looking at at least $1,667/month just to payoff the equity owed to unsecured creditors over the 60 month life of a Chapter 13. That payment would be in addition to any other secured debt payments, so you could be looking at a payment over $2,000/month. Since that exceeds your debt... you'd likely be in a 100% Chapter 13 Plan.

      In other words, you have enough equity to payoff just about everything anyhow. You are not insolvent.
      Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
      Status: (Auto) Discharged and Closed! 5/10
      Visit My BKForum Blog: justbroke's Blog

      I am not an attorney. Any advice provided is not legal advice.


      • #4
        Thanks for the far as equity in the rental house I have roughly $110k but more like $80k after realtor fees and the $15k HELOC is repaid. That would leave us enough to the cards but not the cars, and still leave me in the way more expensive house that also has a $200 monthly pool cleaning fee. Sorry, just thinking out loud. I want to do everything I can to preserve something for my family. I've burned thru my complete 401k being an idiot and trying to play the stock market with calls and put options. I want to do what's right and ethical, but want to be strategic and do the best for us as well. We've only been in our new house a year. We moved out of the one we are now using as a rental. My thoughts were if we moved back into our old one and filed thsn we'd have a fresh start. The stress of trying to keep afloat is wearing on me. Thanks for letting me vent.


        • #5
          I understand your desires as I too went through my 401(k) and tried to save my rental property. In the end, I simply could not afford all those luxuries. The question will be what is your homestead when you file. The homestead will determine whether you have any exemptions for that large amount of equity in that home. That is the simple question.

          Right now, you aren't insolvent. While you have vehicles, they have equity and have value themselves (they are secured debt). You'll certainly need tol be strategic, but without re-establishing the rental as your homestead, this is probably a non-starter.
          Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
          Status: (Auto) Discharged and Closed! 5/10
          Visit My BKForum Blog: justbroke's Blog

          I am not an attorney. Any advice provided is not legal advice.


          • #6
            If, and it's a big IF, we sell the current home (will only break even) and move back into the original home with $110k equity, how much equity can we exempt if we were to file?


            • #7
              I don't know how much you can exempt. The entire question rests on the homestead exemption which could be subject to attack by the Trustee. Right now, you aren't insolvent but you're trying to save equity in a home that is not your homestead. You should really be speaking to local attorneys about asset protection strategies rather than guess about your ability to make your rental property your homestead and whether that is subject to attack. Some homestead laws require you to reside in that home for a period of time, and federal homestead exemptions have caps if you haven't lived in the homestead for some period of time.

              Chapter 7 (No Asset/Non-Consumer) Filed (Pro Se) 7/08 (converted from Chapter 13 - 2/10)
              Status: (Auto) Discharged and Closed! 5/10
              Visit My BKForum Blog: justbroke's Blog

              I am not an attorney. Any advice provided is not legal advice.


              • #8
                Yes, that is probably the best idea. Just to clarify...our "rental property" was our first and only home we've ever owned and lived in until last year. We lived in it for 16 years before getting the urge to move out, buy another home, and rent it the old one. The reasons for moving back into our old house, or rental property, are two fold. Yes we want to preserve the last bit of equity or money we have to our names, but more importantly, we just don't LIKE our latest house. It's a step down in quality and it's on a very busy street which we hate. It has a pool and that caught the attention of my wife and kids but that is the only thing we like (and it's expensive to keep serviced). If we tried to sell it we'd only break even or clear $5k max after fees and what we owe. I'm ready to get back to basics and start over (again).


                • #9
                  Your profile says you live in Texas. Texas has an unlimited homestead exemption.

                  Consult with a local bankruptcy attorney to find out what the requirements are to qualify for the homestead exemption if you move back to the old home. Then, if you decide for sure that you want to do that, talk to your tenants and let them know that you do not plan to renew the lease when it expires and that you are willing to terminate early if they want to move out early. You could even offer to pay them to leave early.
                  LadyInTheRed is in the black!
                  Filed Chap 13 April 2010. Discharged May 2015.
                  $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!


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