Saturday, October 8, 2011

Bank Is Not Necessarily Entitled To Rental Income

If you have rental properties with tenants paying rent, do you ever wonder what would happen to those properties, and rental income, if you were to file a Chapter 7 bankruptcy? Does a demand letter from the mortgagee for the rental income mean all the rental income must go to the mortgagee? Well, not necessarily.

Florida Statute Section 697.07(4) states, “Upon application by the mortgagee or mortgagor, in a foreclosure action, and notwithstanding any asserted defenses or counterclaims of the mortgagor, a court of competent jurisdiction, pending final adjudication of any action, may require the mortgagor to deposit the collected rents into the registry of the court, or in such other depository as the court may designate. However, the court may authorize the use of the collected rents, before deposit into the registry of the court or other depository, to:
(a) Pay the reasonable expenses solely to protect, preserve, and operate the real property, including, without limitation, real estate taxes and insurance;
(b) Escrow sums required by the mortgagee or separate assignment of rents instrument; and
(c) Make payments to the mortgagee.

The intent of the statute is to provide additional security that the property will have its taxes paid, insurance paid, and be maintained to prevent the wasting of the property.

In re: One Fourth Street North, Ltd., a 1989 bankruptcy case out of the Middle District of Florida, the debtor was authorized to use rents to maintain the property and pay its ordinary operating expenses. The court recognized Florida intends for the assignment of rents to be made upon judicial determination as to the mortgagee's rights to the rents.

So, upon the filing of bankruptcy, you have the ability to petition the court for a determination of how the rental income should be used, how much should be sent to the mortgagee, and how much should be deposited with the Court.

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