Will I Lose My Rental Property If I File Bankruptcy?

The real answer is, it depends. Many factors have to be considered, including whether you file a Chapter 7 or Chapter 13 bankruptcy, how much money you owe on the property, and what is the property worth.

I recently spoke with a client that was told by another attorney, during a 15 minute consultation, that he would lose his rental property if he filed bankruptcy. After all, people assume they will lose everything when they file bankruptcy anyway.  If the property is turned over to the bankruptcy estate and liquidated, then it is expected. But what if the attorney is wrong, and the debtor is able to keep the house. Well, maybe the attorney is then viewed as a hero. My point is, during a consult, it is always easy, and safe, for an attorney to simply say you will lose the property.  But such is not necessarily always the case.

CHAPTER 7

First, lets take a look at a Chapter 7 bankruptcy. When you file a Chapter 7 in Florida, there a federal and state exemptions that determine what you can keep, and what will become property of the bankruptcy estate and liquidated. This will vary from state to state. For example, in Florida, one gets an unlimited homestead exemption, whereas most states limit their homestead exemption; this refers to the amount of equity you can have in your home that is exempt from being able to be administered by the Trustee. Unfortunately, this does not apply to rental property. There may be some statutory exemptions that can cover some of the equity in the rental property to make it feasible for the debtor to keep the property. Of course, if there is no equity in the property, it would be highly unusual that the trustee would want the property. The trustee will only sell property if the trustee can obtain a net gain, thereby allowing for a distribution of funds to unsecured creditors.

For example, if a rental house with a market value of $100,000 had a mortgage with a principal balance of $97,500, and it would cost the trustee $3,000 to sell the property, the net after sale would be $97,000. This is not enough to cover the mortgage. The trustee would only sell the property if there is going to be money left over to send to creditors. So, in practice, there needs to be more than just minimal equity in the proeprty.

CHAPTER 13

Now lets look at a Chapter 13. Usually, its you can keep your property in a Chapter 13, including rental property. However, there are other considerations we must look at. For example, the property could be eligible for a cramdown. That is, the mortgage could be modified, bringing the balance owed down to the value of the property, and interest modified to be something above prime, with the acceptable interest rate often either determined by agreement of the parties, or determined by the Court. This could have the effect of lowering the monthly mortgage payment, which could have an impact on whether it is feasible to keep the property. One can do a cramdown on many types of secured property, including rental property, but not your homestead.

But, this is far from the only consideration as to whether you will be able to keep the property in a Chapter 13. The trustee will most likely look at whether you will receive a net profit from the property. If not, then the Trustee will probably take the position that the property is not necessary for the debtor to complete the Chapter 13, and ask for the property to be liquidated. The trustee doesn't want the debtor to keep the property if it is shown it will have a net negative cash flow, as this diminish the debtor's disposable income, thereby diminishing the amount of money the debtor could send to the Trustee.

Determining whether or not rental property can be kept when filing bankruptcy has to be determined on a case by case basis. If you have any questions about your particular situation involving rental property, you should consult with a local bankruptcy attorney that will give you the time to properly advise you as to your options.