Chapter 13 or Chapter 11?
I'm not the bankrupt in question, I'm the son, just to get that out of the way (but I might file CH7 myself later on). This is about their problem. Sorry, it's a bit complicated.
First, my parents have raised my brother's three special needs kids since infancy; all are now adults but only one is prepared to live on his own (and in fact he has a baby due this week). There was kinship support, not full child support. My parents are now past retirement age; my mother still works.
Second, my dad clearly has Alzheimer's. Beginning last year there were clear symptoms and this year was one fight after another to get him into medical treatment and to open up about the finances. He was always stubborn and secretive about the money and although I helped him with his taxes I mainly worked on the real estate side of things.
Third, there are three rental properties. A four-unit, a duplex, and a small house. Due to his mismanagement, he basically became a slum lord. The house is empty, no furnace, needs $20K in work to make livable. The duplex is rentable on one side (just barely, needs a couple weeks of work), but not the other (used as office/storage for 20 years, renovations stalled in the 1980s). The four-plex is fully rentable, but the only full-price on-time tenant has just moved out.
As I gained access to the books this fall I was disturbed at how much consumer debt he had racked up. I always thought the rentals paid for themselves (even including the empties), but couldn't figure out why he was always so strapped for cash (owes me around $20K too). Turns out he was carrying, by this year, around $100K in revolving debt. Oddly, he seems never to have missed a payment (well, autopay helped) on over 20 accounts including four cards with Chase alone, even while getting a week here, a week there later on the big investment mortgage.
Two alarm bells appeared. One was that a personal note from the seller of the four-plex had been carried for years as interest-only, and after that man's death the estate apparently orally released my dad. Fine in any other year, as with exemptions, passive losses, and everything else they never pay a dime in taxes. An extra $20K income would put them back in black. Then the second bell rang, which was that he spent out a $30K IRA to cover mortgages and property taxes this year. So an extra $50K in taxable income, and due to his illness he just didn't grok that this was a problem. (Well, he always thinks I can solve his tax problems for him with some fancy juggling. Not this big, though.) A final blow was finding that their home was maxed out on a $72K HELOC, so no relief from interest rates there, and in fact $56K of that is interest-only.
Worst of all, just as my mother and I were grappling with the enormous size of the debt load, the loss of the reitrement account, and his growing illness (other stresses include a car he wrecked even though he wasn't supposed to drive, and legal penalties therefrom), and the second of two good-pay tenants moved out, the cash flow ran out, too. He made a "promise to pay" on a mortgage and it bounced. Oh, it doesn't help there's a code enforcement order on an outbuilding, and a broken fire panel in the four-plex, both needing immediate cash attention that we just don't have.
My Mom and I have spent the last month getting control of the money. I had to password-protect Quicken and steal his plastic in the middle of the night. He STILL wants to run everything the way he always did, even though he spends hours every day lying on the sofa nearly catatonic. When he gets up, on his own schedule, he wants to be the "family boss".
(Alzheimer's is a cruel disease. Last week he defended himself in a court hearing on the traffic charge, refused to take a deal we told him to accept, and made a sad fool of himself. Fortunately the judge and DA understood his condition but he still ended up with a money judgement. This man was a university-educated public speaker and eloquent writer, but now can't make a note to our tenants that isn't a run-on sentence. I hope you never have to experience this in your family.)
Lastly as preamble I should point out that it was always my desire that the property should be put into a special needs trust for the kids, because the "parents" they know will die when they're still young adults. I will be there for them but I wanted part of the estate to be there too. My dad never did one move for this. We now have no choice because if he ends up in a Medicare facility after insurance runs out (unknown years in future) there is a lookback and property cannot be transferred EXCEPT to a special needs trust. But now we're actually in fear of losing the entire investment.
Back in November he heard my mom say "bankruptcy" and the next day he made an appointment with the family lawyer. It was too soon and I'm not sure he has the family interests at heart. He actually said he wouldn't be OUR lawyer if we had to take my dad into a competency hearing. We stopped trusting him then. He was thinking a quickie 7, probably.
Another consultation with one of our banks about a forbearance gave us a referral to credit counseling. I had been doing some debt-snowball planning until I realized that all his credit card payments were taking him about $1500 over his budget every month. (No wonder the IRA was being run out.) It was pretty clear to CCCS that they were candidates for bankruptcy.
The problem with a 7 is that selling the three rentals "as is" in this market might JUST cover the consumer debt. That would leave my Mom stuck in a house with a buttload of a lien to pay off, bad credit, in a bad neighborhood (by local standards), and now no longer able to control the tenants in the adjacent properties. The kids also get nothing. My and my Mom's sweat equity go down the tubes, as does her inheritance that was the down payment. I hope this doesn't end up being the solution because in my view it sucks.
But a CH13 is going to be dicey for a number of reasons. First, I think debt payoff is going to be in the neighborhood of 100%, because of the CH7 liquidation test. That necessitates a 60-month plan. I hate to put her on a no-disposable-income train, but truth to tell it was sort of the way my dad treated her. Second, she does need to retire somewhere in the plan. I think it is swingable due to her pension but I see confirmability issues. Third, the tenant situation is so dire right now that we're only taking in about half the rent we should (ideally $2800 if all tenants paying). It will take getting both apartments rented to have an income that will make a 60-month plan fundable. Fourth, the four-plex has a weird mortgage situation because of the personal note and a sub mortgage that is unreleased but not being paid since 2003. I think we'll have to have a real-estate lawyer straighten that out and it might take weeks or months.
I do think it's feasible to go with a plan, though, because the potential rent of just the ready or almost-ready units is around $3600, or $2000 net per month. If we can get the duplex fully rented that's another $500, but we'd have to invest time and at least some cash. In my view, the property can easily pay for itself and a plan. And keeping the property means in five years it's $400K in real estate in a trust for the kids with only about $200K in mortgage debt. But we need time to get to that point and the BAPCPA equal payments provision would be a problem, especially the first year.
I would be hoping for cramdowns on the two rental mortgages. I'd like to know a bit more about how that works when you're not lien stripping. How likely that I can get a plan interest rate and change an ARM (with a 2011 reset) to fixed, if I'm not doing anything else? Or extend the period? But I'm not paying off the mortgage in full during the plan, so is this even possible? And if I cram down a mortgage from a local credit union, will they ever speak to me again? Another question is our tenants. I didn't know how bad payers they all are, and while I'm fond of them, I want my Mom and the kids to eat. I worry that we would be pressured to evict by the trustee unless they pay in full and on time during the plan. So be it, but what do I tell them?
So I think going with a plan could work, I just don't know if we can get one confirmed as a CH13 right now that we need it to possibly forestall foreclosure or a creditor lawsuit.
Here's where CH11 comes in. I know it's damned expensive, but the way I see it, those properties are a future legacy for the special needs kids once my parents are gone, and saving that is worth the money. The two things about CH11 that entice me are the greater time to form a plan, and the potentially longer plan duration. There are other daunting things about CH11, but the biggest negative that worries me is being unable to voluntarily dismiss, unless it's to CH7, but I guess that's where we'd be anyway.
So, does anyone disagree with me and if so why? This is so big and scary and I have been totally immersing myself in ************************ and Nolo books but I still feel daunted by the vastness of it all. My Mom is very nearly numb on a daily basis. We're seeing a consumer BK attorney this afternoon, but we will probably have to discuss CH11 with one of the bigger local firms.
Your insights greatly anticipated, even just to one or two points above. Thanks.
First, my parents have raised my brother's three special needs kids since infancy; all are now adults but only one is prepared to live on his own (and in fact he has a baby due this week). There was kinship support, not full child support. My parents are now past retirement age; my mother still works.
Second, my dad clearly has Alzheimer's. Beginning last year there were clear symptoms and this year was one fight after another to get him into medical treatment and to open up about the finances. He was always stubborn and secretive about the money and although I helped him with his taxes I mainly worked on the real estate side of things.
Third, there are three rental properties. A four-unit, a duplex, and a small house. Due to his mismanagement, he basically became a slum lord. The house is empty, no furnace, needs $20K in work to make livable. The duplex is rentable on one side (just barely, needs a couple weeks of work), but not the other (used as office/storage for 20 years, renovations stalled in the 1980s). The four-plex is fully rentable, but the only full-price on-time tenant has just moved out.
As I gained access to the books this fall I was disturbed at how much consumer debt he had racked up. I always thought the rentals paid for themselves (even including the empties), but couldn't figure out why he was always so strapped for cash (owes me around $20K too). Turns out he was carrying, by this year, around $100K in revolving debt. Oddly, he seems never to have missed a payment (well, autopay helped) on over 20 accounts including four cards with Chase alone, even while getting a week here, a week there later on the big investment mortgage.
Two alarm bells appeared. One was that a personal note from the seller of the four-plex had been carried for years as interest-only, and after that man's death the estate apparently orally released my dad. Fine in any other year, as with exemptions, passive losses, and everything else they never pay a dime in taxes. An extra $20K income would put them back in black. Then the second bell rang, which was that he spent out a $30K IRA to cover mortgages and property taxes this year. So an extra $50K in taxable income, and due to his illness he just didn't grok that this was a problem. (Well, he always thinks I can solve his tax problems for him with some fancy juggling. Not this big, though.) A final blow was finding that their home was maxed out on a $72K HELOC, so no relief from interest rates there, and in fact $56K of that is interest-only.
Worst of all, just as my mother and I were grappling with the enormous size of the debt load, the loss of the reitrement account, and his growing illness (other stresses include a car he wrecked even though he wasn't supposed to drive, and legal penalties therefrom), and the second of two good-pay tenants moved out, the cash flow ran out, too. He made a "promise to pay" on a mortgage and it bounced. Oh, it doesn't help there's a code enforcement order on an outbuilding, and a broken fire panel in the four-plex, both needing immediate cash attention that we just don't have.
My Mom and I have spent the last month getting control of the money. I had to password-protect Quicken and steal his plastic in the middle of the night. He STILL wants to run everything the way he always did, even though he spends hours every day lying on the sofa nearly catatonic. When he gets up, on his own schedule, he wants to be the "family boss".
(Alzheimer's is a cruel disease. Last week he defended himself in a court hearing on the traffic charge, refused to take a deal we told him to accept, and made a sad fool of himself. Fortunately the judge and DA understood his condition but he still ended up with a money judgement. This man was a university-educated public speaker and eloquent writer, but now can't make a note to our tenants that isn't a run-on sentence. I hope you never have to experience this in your family.)
Lastly as preamble I should point out that it was always my desire that the property should be put into a special needs trust for the kids, because the "parents" they know will die when they're still young adults. I will be there for them but I wanted part of the estate to be there too. My dad never did one move for this. We now have no choice because if he ends up in a Medicare facility after insurance runs out (unknown years in future) there is a lookback and property cannot be transferred EXCEPT to a special needs trust. But now we're actually in fear of losing the entire investment.
Back in November he heard my mom say "bankruptcy" and the next day he made an appointment with the family lawyer. It was too soon and I'm not sure he has the family interests at heart. He actually said he wouldn't be OUR lawyer if we had to take my dad into a competency hearing. We stopped trusting him then. He was thinking a quickie 7, probably.
Another consultation with one of our banks about a forbearance gave us a referral to credit counseling. I had been doing some debt-snowball planning until I realized that all his credit card payments were taking him about $1500 over his budget every month. (No wonder the IRA was being run out.) It was pretty clear to CCCS that they were candidates for bankruptcy.
The problem with a 7 is that selling the three rentals "as is" in this market might JUST cover the consumer debt. That would leave my Mom stuck in a house with a buttload of a lien to pay off, bad credit, in a bad neighborhood (by local standards), and now no longer able to control the tenants in the adjacent properties. The kids also get nothing. My and my Mom's sweat equity go down the tubes, as does her inheritance that was the down payment. I hope this doesn't end up being the solution because in my view it sucks.
But a CH13 is going to be dicey for a number of reasons. First, I think debt payoff is going to be in the neighborhood of 100%, because of the CH7 liquidation test. That necessitates a 60-month plan. I hate to put her on a no-disposable-income train, but truth to tell it was sort of the way my dad treated her. Second, she does need to retire somewhere in the plan. I think it is swingable due to her pension but I see confirmability issues. Third, the tenant situation is so dire right now that we're only taking in about half the rent we should (ideally $2800 if all tenants paying). It will take getting both apartments rented to have an income that will make a 60-month plan fundable. Fourth, the four-plex has a weird mortgage situation because of the personal note and a sub mortgage that is unreleased but not being paid since 2003. I think we'll have to have a real-estate lawyer straighten that out and it might take weeks or months.
I do think it's feasible to go with a plan, though, because the potential rent of just the ready or almost-ready units is around $3600, or $2000 net per month. If we can get the duplex fully rented that's another $500, but we'd have to invest time and at least some cash. In my view, the property can easily pay for itself and a plan. And keeping the property means in five years it's $400K in real estate in a trust for the kids with only about $200K in mortgage debt. But we need time to get to that point and the BAPCPA equal payments provision would be a problem, especially the first year.
I would be hoping for cramdowns on the two rental mortgages. I'd like to know a bit more about how that works when you're not lien stripping. How likely that I can get a plan interest rate and change an ARM (with a 2011 reset) to fixed, if I'm not doing anything else? Or extend the period? But I'm not paying off the mortgage in full during the plan, so is this even possible? And if I cram down a mortgage from a local credit union, will they ever speak to me again? Another question is our tenants. I didn't know how bad payers they all are, and while I'm fond of them, I want my Mom and the kids to eat. I worry that we would be pressured to evict by the trustee unless they pay in full and on time during the plan. So be it, but what do I tell them?
So I think going with a plan could work, I just don't know if we can get one confirmed as a CH13 right now that we need it to possibly forestall foreclosure or a creditor lawsuit.
Here's where CH11 comes in. I know it's damned expensive, but the way I see it, those properties are a future legacy for the special needs kids once my parents are gone, and saving that is worth the money. The two things about CH11 that entice me are the greater time to form a plan, and the potentially longer plan duration. There are other daunting things about CH11, but the biggest negative that worries me is being unable to voluntarily dismiss, unless it's to CH7, but I guess that's where we'd be anyway.
So, does anyone disagree with me and if so why? This is so big and scary and I have been totally immersing myself in ************************ and Nolo books but I still feel daunted by the vastness of it all. My Mom is very nearly numb on a daily basis. We're seeing a consumer BK attorney this afternoon, but we will probably have to discuss CH11 with one of the bigger local firms.
Your insights greatly anticipated, even just to one or two points above. Thanks.
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