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Filing Bankruptcy While Holding Rental Property

Posted By admin || 26-Jan-2010

Rental Property and Bankruptcy

Bankruptcy and Rental Property

Holding rental property when filing bankruptcy can impact your "means test" and your post-bankruptcy fresh start depending on the circumstances surrounding that property.

Let's take a look at a few scenarios:

  1. If you have a rental property with a paying tenant, the rent received will be counted towards your income.  This fact alone could cause you to "fail" the means test which would mean that you would need to file Chapter 13 bankruptcy instead of Chapter 7 bankruptcy . This may not be such a bad thing, if you were planning to file Chapter 13 bankruptcy anyway.
  2. If your rental property's mortgage  is delinquent and foreclosure is imminent, it might be wise to serve the tenant notice before bankruptcy and "voluntarily surrender" the property during bankruptcy. This works for many debtors in bankruptcy because it insures that there will not be a post-bankruptcy foreclosure. And if you are dependent on rental income to make your mortgage, a post-bankruptcy foreclosure could be a real danger.
  3. Other debtors may choose to sell the property before they file bankruptcy. If the property has lost value and you're upside-down on your mortgage you can do a short sell and discharge the balance you owe the mortgage company in bankruptcy. Remember, if you have a tenant, you will need to give them proper notice before any sell or voluntary foreclosure.

Avoid "Owner-Financed" Deals

One word of caution, some debtors attempting to beat the market have engaged in "owner-financed" deals with their tenant. If that sounds like you, this transaction will be treated like business income and you may have difficulty getting out of the contract agreement with your tenant considering that they have an interest in the property. Please speak with your bankruptcy attorney to find out how to handle your special real estate issues during bankruptcy.

Have Questions About Bankruptcy and Rental Property?

If you have any questions related to rental property and bankruptcy, you can always contact us to set up a free consultation.

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