Investment Properties = Business Debt?

[supastar84]

So here is my situation:

I have four rental properties that were all purchased about a yr ago. I could go into a lot of details about how this situation arose, but I will try to only state what is relevant. All the homes will be foreclosed on within the next month or two. The homes have no equity, no liens (only one mortgage), and I owe probably about 30k more on each home than it would sell for. I just graduated college last yr, and have no other debt besides these mortgages (no car loan, student loan paid off). Also, I don't really have any assets at this point either.

I was planning on letting the homes all get foreclosed on, and then just hope that lenders don't come after me for deficiency judgments (def judgments are unlikely in GA from what I hear). However, I am going to have some big tax implications from that (would probably have cancellation of debt income of ~120k).

So, I want to file BK ch 7 for several reasons: tax purposes, eliminate the chance of deficiency judgment, possible make my credit report more explainable.

Knowing what I know now, I should have filed before even becoming deficient (now I have 3 months of late payments on credit report). However, at the time I called a few BK attorneys and they said they didn't think I would qualify for BK because of my income (i am an engineer).

Anyway, I decided to consider it one more time so I called a different BK atty last week and says it will be no prob to get me thru. He thinks that my debt will qualify as "business debt", thus allowing me to bypass the means test.

So, does anybody have any advice or knowledge on this? I have to file by next week if I am going to (because I need to file before 1st foreclosure occurs, which will be 8/7).

THANKS SO MUCH for any thoughts/opinions!

[HHM]

Strictly speaking, you don't "have" to file before the first foreclosure happens.

In any event, the last attorney you spoke with is probably correct, that rental property debt would not be considered consumer debt. However, lets just make sure you have no other debt, do you have any credit card debt, do you have student loans, do you have own a house that you reside in and have a mortgage?

[CindyLou]

would it be considered "hijacking" if I asked to explain why you don't have to pass the means test if the debt is business debt? I have a friend being sued for 800,000 for a lease from a failed business after katrina. He makes approx. 150,000 per year, but was told he makes too much for chp. 7. Under the above situation he would qual. for chp 7; is this correct?

[familyof7]

From the little I know about it is if the debt is primarly business related and you file chapter 7 as a business you dont have to take the means

[supastar84]

Right, I have NO other debt. Already paid off student loans, no credit card debt, don't own a home as my personal residence (rent).

All the mortgages are in my name and personally guaranteed by me (recourse). This is why I initially thought that this might not be able to pass as business debt. But this atty (lawyer#1) seems to think that doesn't matter. He says it is clear that I would not own four houses to live in for personal use, so obviously they were used for business. This def makes sense, but i don't know the law. I just hope this lawyer is correct in what he is saying.

I talked to another lawyer (call him lawyer #2) last week. He thinks that it can't be classified as business debt since debt is in my name. So, he went ahead and did the means test for me. The means test approved me for Ch7. However, it is obviously only because of these large mortgage payments. This lawyer's only concern was that the trustee would push me into ch13 because my only debt is these homes (which I dont' want anymore and want to be discharged anyway). His basis for saying this was that he thought he had read it in case law somewhere.

Anyhow, I'll have to make the decision to decide who knows what they are talking about. Another thing to note is that atty fees are a lot cheaper on consumer route vs the business route. I am willing to pay the price for the one that is most likely to get me through this, but then again i dont want to pay to do business when I could have done consumer.

Thanks again for any advice.

[Boscoe]

You may need to consult with different attorneys. If > 50% of your debt is related to these investment properties (for 4 of them, I would say so), then you can file a 7 as a business case. You will just need to prove it, with the HUD statements, your mortgage loan statements, etc. I know someone who is doing exactly this, and their attorney said as long as the MAJORITY of debts are investment/business, then you should be all set. You must include all debt, even that you are not getting rid of, like primary home, cars, etc. Definitely go for it and keep on asking. Anyone who says it is consumer simply because your name is on it is not informed.

[Brendon]

THis is True. I filed Ch 7 in August '06. My debt was 95% business debt. By the time I filed, I had already accepted a new job making $120k+, but never took the means test. Case has been dismissed since Nov '06.

[supastar84]

Brendon, good to hear. I have a question though. Didn't you show disposable income when filling out the bankruptcy schedules for income and expenses (since u had salary of 120k)? And if so, they didnt try to set up any repayment plan?

When my atty initially filled out my forms i was showing that I had money left over after expenses. Even though I was filing as a business debtor and could bypass means test, i apparently still can't have disposable income showing? He said they would try to make me set up a repayment plan probably. Anyhow we went back and modified and made sure to get all expenses listed any got me down to less than 100/mo disposable. I am just wondering how you dealt with this.

[uofaguy]

Any additional info?

Supastar -

I'm curious as to whether you ended up filing Chapter 7 and if you have any additional info?

I live in AZ and purchased a spec house and leaseback home (mortgages in my name personally) from a builder in Austin, TX. It turns out there was major fraud in the development and the builder has declared bankruptcy. I am now stuck with a couple of investment homes that are not even finished and are worth significantly less than the mortgages. I am trying to work on a short sale or deed in lieu with the banks but am not confident it will work. If not, my best bet looks to be Chapter 7. However, I have spoken with 2 BK attorneys and both tell me I qualify for Ch. 7 based on the large mortgages I owe, but once those are discharged, the trustee will likely push me to Ch 13 because of my above the state median income level.

Any thoughts - other advice from those with insight?

Thanks,
Jon

[Boscoe]

I did exactly this. Purchased 3 properties in FL, all now can't be sold for what I owe on them due to the terrible market. Attorney filed a ch 7 business case since my debt was >50% business/investment debt. You may have the US trustee take a closer look at everything if you are over the median income level, but you definitely can do it!

[uofaguy]

Boscoe - thanks for the follow-up.

It is very helpful to learn from others who are/were in a very similar situation. Now I just need to find a good business BK attorney that is on the same page. I am surprised that the two attorneys I have spoken with (one of whom charges $450/hr) did not mention this and instead have given my wife and I many sleepless nights about Ch. 13.

Thanks again.

[Boscoe]

What state do you live in? I might be able to recommend 2 or 3attorneys to contact.

[uofaguy]

I am in AZ (a community property state) and would greatly appreciate any referrals to an attorney that is knowledgable of business debt and pursuing that as a way to Ch. 7 (i.e. means test is not required).

Our only debt is 1) a car lease and the mortgage on our primary residence that we want to keep & 2) significant mortgage debt on some investment properties that are now underwater as the builder left about 50 of us with unfinished homes while extracting millions from the project (we are happy to give these properties back to the banks and move on from this fraud).

I am married and my wife and I are both on the mortgages for our investment properties except one, in which my wife alone is on the note and it is titled as her separate property.

I met with an attorney yesterday who was insistent that given our joint marital income we would be forced to Ch. 13. However, he mentioned that my wife should be able to file alone and because AZ is a community property state, the mortgages would all be discharged under her bankruptcy so I would not have to file (and thus, at least one of our credit ratings would be slightly preserved). This was news to me.

Given the above, my ideal scenario (if there is anything ideal about this mess) would be for my wife to file Ch. 7 as business debt (since the mortgage balances on the investment homes is significantly greater than our primary residence mortgage) and the investment mortgages to go away.

Thanks - Jon.

[Boscoe]

Jon:

I hope you live in the Phoenix area.....these are all bk trustees themselves (at least the first 2 are) and they know this process inside and out....ask them for the help you need.

Good luck!

Robert A. MacKenzie
2025 N. 3rd St., Suite 157
Phoenix, AZ 85004
E-mail: [email protected]
Phone: (602)229-8575

David M. Reaves
P.O. Box 44320
Phoenix, AZ 85064-4320
E-mail: [email protected]
Phone: (602) 241-0101

Lawrence J. Warfield
P.O. Box 14647
Scottsdale, AZ 85267-4875
E-mail: [email protected]
Phone: (480)948-1711

[uofaguy]

I am in the Phoenix area and greatly appreciate the contacts. THANK YOU!