Rental Property included in Chapter 7

[brighteyes]

We own a home, since 2004, that was our primary residence until 2/2010. DH was transferred and we had to move out of state. Luckily we found good tenants that signed a 2 year lease. Our home has a notice of sale for May and we will be filing BK in April (have to wait for a Bonus to fall off). We have every intention of keeping the home, as we will be moving back there by the end of the year. We really like our tenants and don't want them to stress out or have 5000 people/phones calls about the house. Is there anything I can do so that people won't bother the tenants? I have told them to not worry about the house. If everything failed and nothing went they way that I have been planning for months then they have at least 6 months till they are 'possibly' kicked out by the banks. Since I don't intend for it to happen that way, what can I say or do to ease their minds?

On a side note. We are planning on including the home in the chapter 7, then sign a loan mod on the first and settle the second. Anyone have experience on that? I know it's risky, but we'll give it our best shot.

[despritfreya]

1. The house AND the debt must be listed in the bk.

2. Is there any equity in this home? I assume no, but if there is the Chapter 7 Trustee is going to sell the property.

3. I trust you are not collecting rents. If you are collecting rents, any rents collected after the moment you file Chapter 7 will have to be turned over to the Trustee as those rents do not belong to you. If you fail to follow this rule you can lose your right to a discharge.

4. You have a lease with the folks living in the property. You need to list the lease on Schedule G.

5. You seem confident that you will be signing a loan mod. Once you file bk, the lender will most likely stop talking to you and once it resumes talking to you it will most likely instruct you that it cannot modify the loan without bk court approval. If this happens you will need to be prepared to file a Motion. There is a sample Motion posted in the forum dealing with samples.

6. If you do not have a loan modification on the bubble and the lender simply does not want to deal with you, the lender, within a short period of time after filing is going to file a Motion for Relief from the Automatic Stay and, once granted, is going to complete its foreclosure. Even if it is working with you it may still file the Motion.

I hope you get to keep the property but do not be too disappointed if it does not work out.

Best wishes.

Des.

[brighteyes]

1. The house AND the debt must be listed in the bk.
Yes, I'm aware of that.

2. Is there any equity in this home? I assume no, but if there is the Chapter 7 Trustee is going to sell the property.
No, no equity. Will break even when the second is gone

3. I trust you are not collecting rents. If you are collecting rents, any rents collected after the moment you file Chapter 7 will have to be turned over to the Trustee as those rents do not belong to you. If you fail to follow this rule you can lose your right to a discharge.
Of course I'm collecting rent! When the loan mod goes through I'm gonna have to pay what we are behind on. Plus I still have to pay taxes, HOA, Yard, Pool, insurance! And I have to disagree with you on the money not belonging to me at the time of filing. I am still liable for that home until the court tells me I'm not. I would have to say once the BK is discharged then maybe. But even then I'm still liable for the (again) taxes, HOA, Yard, Pool, and insurance until the mortgage company forecloses on my property and gets it out of my name.

4. You have a lease with the folks living in the property. You need to list the lease on Schedule G.
Yes, they have a lease until Feb. next year. We have already told them they can get out when ever they want.

5. You seem confident that you will be signing a loan mod. Once you file bk, the lender will most likely stop talking to you and once it resumes talking to you it will most likely instruct you that it cannot modify the loan without bk court approval. If this happens you will need to be prepared to file a Motion. There is a sample Motion posted in the forum dealing with samples.
I'm not necessarily confidant, I just don't care which way it goes. If I can get close to what I want in our loan mod then great, if not, they can have the house.

6. If you do not have a loan modification on the bubble and the lender simply does not want to deal with you, the lender, within a short period of time after filing is going to file a Motion for Relief from the Automatic Stay and, once granted, is going to complete its foreclosure. Even if it is working with you it may still file the Motion.
We are not filing until April and the sale date is in May. The lender told me that we will know our answer before that (I'm taking that with a grain of salt). I do know I have a couple of large bargaining chips on the table as far as TILA violations and the fact that I have a World Savings/Wachovia Pick-a-Pay loan. I would also like to think that they would like to get some money out of this rather than no money.

I hope you get to keep the property but do not be too disappointed if it does not work out.
Like I said before, don't really care either way. Just thought we would give it one last try. It never hurts to ask for a super cheap deal, what's the worst they are going to say, No? I'm already filing for BK, so I'm fine with a No

[despritfreya]

Of course I'm collecting rent! When the loan mod goes through I'm gonna have to pay what we are behind on. Plus I still have to pay taxes, HOA, Yard, Pool, insurance! And I have to disagree with you on the money not belonging to me at the time of filing. I am still liable for that home until the court tells me I'm not. I would have to say once the BK is discharged then maybe. But even then I'm still liable for the (again) taxes, HOA, Yard, Pool, and insurance until the mortgage company forecloses on my property and gets it out of my name.

I sure hope you are using an attorney since you do not understand the gravity of the situation.

1) The lease is an asset of the estate. The right to collect rents, the moment you file, is not your right, it is the right of the Bk estate until the Trustee rejects the lease.

2) The property is not exempt. The property is an asset of the estate. The rents generated by that property (with or without a lease), the moment you file, become an asset of the Bk estate. Until the property is abandoned the asset and the rents it generates do not belong to you. Nor do they belong to the mortgage lender unless the mortgage includes an assignment of rents (unlikely).

If you take property of the estate and the Trustee figures it out you will face 1) A complaint for turnover and possibly, 2)A complaint to deny you a discharge under 727(a)(2).

If the rents hit your possession, dominion or control after you file you better turn them over.

I can only warn folks of the potential consequences of their actions. What they do after that. . .

Des.

[BKParalegal]

As an paralegal for a Chapter 7 Trustee, if there is no equity in the property the trustee is not going to deem it an asset of the estate and therefore will not take the rent payments. If he/she did, they would have to pay the mortgage with those funds etc. The trustee can only seize assets if it benefits the estate, and it doesn't sound like there is anything there.

Good luck with the mod!

[despritfreya]

As an paralegal for a Chapter 7 Trustee, if there is no equity in the property the trustee is not going to deem it an asset of the estate and therefore will not take the rent payments. If he/she did, they would have to pay the mortgage with those funds etc. The trustee can only seize assets if it benefits the estate, and it doesn't sound like there is anything there.

With all due respect you are missing the point:

1. The assets which includes the real property AND any rents it generates AND the lease are property of the estate until the Trustee abandons them. There are three assets here.

a. Real property that has no equity and will eventually be abandoned.
b. Rents generated by the real property that are property of the estate (and benefit the creditors of the estate) from the day the case is filed until the real property is abandoned.
c. A two year lease that ends next February.

2. Unless there is an "assignment of rents" in the Deed of Trust (not likely but possible), the mortgage lender IS NOT entitled to the rents and the Trustee IS NOT going to pay the mortgage with those rents. In fact, if he/she were to turnover the rents he/she would be violating his fiduciary duty to the unsecured creditors as the mortgage lender does not have a perfected security interest in the rents.

Now, if there is an assignment of rents I would agree with you in full.

OP really needs to discuss this issue with legal counsel. Assuming no assignment of rents, I already know what will happen and cases like this show up on my doorstep all the time. My job then becomes that of "damage control".

One last issue. . . it sounds like OP is banking the rent money for future use. If so, the money needs to be disclosed on Schedule B and, hopefully, is protected by some exemption. Otherwise the Trustee takes it.

Des.

[brighteyes]

There is no assingment of rents in my loan papers. My lawyer is aware of the money in the bank. There is no issue as it wilm be covered under the wildcard exemption. I fully intend to bring my loan current at the time of the.mod. my tenants signed a lease agreement with me not my mortgage company. If they choose to stop paying or i stop reciving rents, thrn per our lease agreement they will be evicted.

Sorry for the typos....sent from my phone

[debee]

I'm glad you found this forum, brighteyes.

Your lawyer should have explained to you that when you file bk pretty much everything you own (& any income produced by those assets) will become property of the bankruptcy estate. You won't have control anymore until the trustee abandons the asset. The trustee will be running the show and as Des explained, the trustee will collect the rent and not pay the mortgage.

There are a lot of people on this forum who made mistakes with their bk filing, or who didn't have the whole picture going in and they can only wish they had run across Des (who happens to be a bankruptcy attorney practicing in AZ) earlier. You're really lucky to have the benefit of some good info beforehand.

It's your lucky day.

[BKParalegal]

With all due respect you are missing the point:

1. The assets which includes the real property AND any rents it generates AND the lease are property of the estate until the Trustee abandons them. There are three assets here.

a. Real property that has no equity and will eventually be abandoned.
b. Rents generated by the real property that are property of the estate (and benefit the creditors of the estate) from the day the case is filed until the real property is abandoned.
c. A two year lease that ends next February.

2. Unless there is an "assignment of rents" in the Deed of Trust (not likely but possible), the mortgage lender IS NOT entitled to the rents and the Trustee IS NOT going to pay the mortgage with those rents. In fact, if he/she were to turnover the rents he/she would be violating his fiduciary duty to the unsecured creditors as the mortgage lender does not have a perfected security interest in the rents.

Now, if there is an assignment of rents I would agree with you in full.

OP really needs to discuss this issue with legal counsel. Assuming no assignment of rents, I already know what will happen and cases like this show up on my doorstep all the time. My job then becomes that of "damage control".

One last issue. . . it sounds like OP is banking the rent money for future use. If so, the money needs to be disclosed on Schedule B and, hopefully, is protected by some exemption. Otherwise the Trustee takes it.

Des.

With all due respect, you are missing the point. You have quoted the trustee duties beautifully, but after working for one for 9 years and overseeing 90+ cases a month which comes to...... A billion cases I think, the trustee is not going to take rent payments on a property that was not surrendered or has no equity and therefore will be not be considered an asset of the estate. Yes the client has to list the rental income as well as the monthly secured debt payment. I know of no trustee that would go before a judge to seize a few hundred bucks and not get their ace handed to them. Did i mentioned I work for a trustee.

[debee]

I got the impression OP was not cash-flow positive on this rental. Is that correct, brighteyes?

After you pay the operating expenses on the rental (gardener, HOA, taxes, insurance, pool maintenance, p+i on the 1st and 2nd, etc), how much is left?

[brighteyes]

The mortgage is 2555 and i get 2400/month from my tenants. The other bills total approx 500/ month. So i loose money every month!

[debee]

You can't keep an investment property that loses money in a chapter 7 bankruptcy. The expenses associated with the investment aren't "reasonable & necessary" for your well-being. The court will want that money going to pay your creditors.

[despritfreya]

With all due respect, you are missing the point. You have quoted the trustee duties beautifully, but after working for one for 9 years and overseeing 90+ cases a month which comes to...... A billion cases I think, the trustee is not going to take rent payments on a property that was not surrendered. . .

Sure hope you are right as I have three clients this very moment that wish they had Chapter 7 Trustees who looked the other way. In each case the issues faced by OP were the same issue they faced and in each case the debtors failed to seek advice of "competent" legal counsel. In each case they owe upwards of $10k (post petition/pre abandonment rents collected from upside-down properties to which there were no assignments of rents) to the Chapter 7 Estates.

Like I said, we are doing damage control.

Des.

[ssmdem]

Whew! Glad I quit collecting rent the month before I filed. Told my tenants they were free to live there rent free until the bank foreclosed or until I needed the property for myself, whichever came first. They chose to walk -- fine with me -- especially after I found the damage they had done to the property -- but regardless, had I had that money coming in each month as income and not paying it to the mortgage company, we would have been WAY over the median income and wouldn't have qualified for a chapter 7 in the first place.

I guess my question is how are you qualifying for a chapter 7 if you aren't paying the mortgage? We were in a negative position with ours too -- went in the hole each month $400 between what we could earn in rent and what we had to pay to the mortgage companies. We quit paying the 2nd mortgage about three months before we filed, and that excess was counted into our income average, as it should have been.

[tcreegan]

Hi all, Hi brighteyes,

...would also like to think that they would like to get some money out of this rather than no money.

This should be a no-brainer right? I need more fingers and toes to count the number of people who were turned down for a somewhat profitable deal and the lender ended up with a 5 digit loss.....go figure.

Want a kicker? Was on the phone to middle management at GMAC, begging to contact the investors holding my note to pitch a deal of 3% fixed vs foreclosure and a 30K loss. No, you can't talk to the investors. Don't you think they would be interested in a small profit vs a 30K loss? No, investors know there is risk in mortgage lending Thats what you say, can we at least ask the investors? No, no one can contact the investors.

We are planning on including the home in the chapter 7, then sign a loan mod on the first and settle the second. Anyone have experience on that? I know it's risky, but we'll give it our best shot.

From what I have posted around here, settling the 2nd for 5-10% is very doable, odds on getting a loan mod seem to be about the same as the lottery.....well, maybe not that bad, but still not very good.

Not really risky, just might get told "no" Have a plan B handy and give it your best shot.

Tom in Colo