Filing for bankruptcy is a difficult decision to make. But if it is the only way to manage your debts, it could benefit you in the long run. It helps to understand what happens to what you own at the time of bankruptcy application and the right decision to make for a favorable outcome. For instance, if you own some investment properties and would like to keep or benefit from them, what happens to them after filing for bankruptcy will depend on the type of bankruptcy you file for. If you wish to dispose of them, you must carefully choose the ideal bankruptcy option to file. This article discusses in more detail what happens to your investment properties in bankruptcy. For help and assistance with filing for bankruptcy, reach out to an experienced bankruptcy attorney.
Your Investment Properties
Investment properties are real estate properties you purchase, intending to earn an income from them. The return on investment properties could be in the form of rental income, a profit from the resale of the property in the future, or both. You could own the property individually or as a part of a group of investors or corporations. Some people engage in this business for the long term while others for a short time. A short-term investment entails buying a real estate property, renovating or remodeling it then selling it off at a profit within a short period. The long-term investment includes buying a real-estate property and renting or leasing it for several years before reselling.
Investment properties are an excellent way to earn an income in California. But they could be affected when you file for bankruptcy. If you are about to file for bankruptcy, you should be concerned about the fate of your investment properties after the bankruptcy process. In essence, what happens to your investments depends mainly on the kind of bankruptcy you apply for, whether Chapter 7 or Chapter 13. It helps to work with a legal expert on matters like these to ensure that you make the right decisions from the beginning of the process. That way, you can protect what you intend to keep and dispose of what you need to sell to repay your debts.
Remember that investment properties are not properties you use as your primary residence. They are properties that you keep to generate income, like interests, rents, dividends, or royalties. Your home is treated differently from your other investment properties in bankruptcy. For instance, when you apply for Chapter 13 bankruptcy, you could lose other properties except for your home. In most cases, residential properties are exempt under bankruptcy law. Thus, you could keep your home and lose other properties, depending on the amount you owe in debt.
The first step you take when filing for bankruptcy is to decide on the bankruptcy Chapter to file, depending on your financial situation. Your bankruptcy attorney will guide you on this. The kinds of properties you own will also determine your decision. For instance, if you choose Chapter 7 bankruptcy, you could lose any investment that is not exempt under the law, including your real estate investment. If your investment property has significant equity, your bankruptcy trustee will take and sell it off to pay its mortgage and any loan you have on the investment. Then the trustee will distribute the remaining proceeds to other creditors. But Chapter 13 could allow you to keep your investment property if it does not get in your way of paying your obligations in a 3 to 5 year repayment schedule.
Chapter 7 Bankruptcy and Your Investment Properties
Chapter 7 bankruptcy provides for the liquidation or sale of the nonexempt property and distribution of the proceeds to the creditors. It does not entail developing a repayment plan through which you pay back all your debts. When you file for Chapter 7 bankruptcy, the court assigns a bankruptcy trustee to your case. The trustee will list down your debts in order of priority, including the amount you should pay for every obligation. The trustee will then identify and sell your valuable properties to pay off the listed debts according to the provisions of the Bankruptcy law. The bankruptcy law allows you to keep specific exempt properties while the trustee liquidates the remaining properties.
When you file for bankruptcy Chapter 7, you do not lose all properties protected by the exemption. State and federal laws predetermine exempt properties. The law protects those items you need after bankruptcy, including your car, furniture, clothes, trade tools, and home equity. Exemption on your home only applies to your place of residence and not any other property you keep for an income. Investment properties are not exempt under bankruptcy laws and are listed as properties that could be liquidated once you file for Chapter 7.
If you have investment properties and are struggling to pay their loans (you have more in debt than the properties are worth) and are ready to sell the property to take care of your debts, you are better off filing for Chapter 7. The trustee will not take that property, even when it is exempt, since any returns earned from its sale will only go to what you owe on the property. There will be nothing remaining for the other creditors. But applying for Chapter 7 bankruptcy allows you to decide how you prefer to handle your secured loans, including those you have secured using your investment properties.
Your main option would be to surrender the investment property to the creditors. Doing that would automatically eliminate your responsibility for that debt even though what you have in debt is greater than the property's worth. The bankruptcy court will discharge or wipe out any debt that exceeds the property value in your case. That takes care of one of your large debts.
But if you have good equity in the investment property, you will likely lose that by filing Chapter 7. You could tell the judge of your desire to keep your property and reaffirm your willingness and ability to continue making payments on that property. But still, the trustee can take the property and sell it to raise money for other creditors if your other properties are insufficient. Thus, your decision to file for Chapter 7 must be based on whether or not you have equity in the investment property.
But remember that you have to be eligible for Chapter 7 to file for it in bankruptcy court. Qualifying for Chapter 7 bankruptcy requires you to be an individual, cooperative, partnership, or any other entity. You will undergo a means test if you are an individual debtor to determine whether your current financial situation allows you to file for this particular bankruptcy type. You will also receive debt relief irrespective of the amount you owe in debts and whether you are solvent or insolvent.
Chapter 13 Bankruptcy and Your Investment Properties
Chapter 13 bankruptcy allows you to keep your valuable assets, including investment properties. Thus, it is an ideal bankruptcy type for investors that are not ready to let go of their investments even after facing a difficult economic time. In this bankruptcy type, you will not be expected to surrender your properties. Instead, you should pay part of your debts within a predetermined period. In that case, your trustee will help you develop a debt repayment plan that you must honor for 3 to 5 years. But your investment properties will still be affected in these ways:
Increase Required Payments
When you file for Chapter 13 bankruptcy, you agree to pay off your debts over a given period. You devise a payment plan designed according to the income you receive and your expenditure. You must at least pay off your insecure debts the amount of the nonexempt properties, including the investment properties you have. It ensures that you pay your creditors at least what you could have paid them if you filed for Chapter 7 bankruptcy. Thus, if you have more equity in your investment properties, it could raise the amount you should set aside for debt repayments after filing Chapter 13.
It means that you will have less income for your expenses. However, you will pay off your debts more quickly.
Enable You to Pay Arrearages in Your Repayment Plan
The idea to file for bankruptcy comes when you realize that you can no longer manage your debts as you should. By the time they apply for bankruptcy, most people have debts arrears from missed repayments. If there are missed repayments on your investment properties, Chapter 13 enables you to keep up with your payments through a repayment plan. You can include the money you have in debt in your repayment schedule and then pay it back within the given period. You could avoid foreclosure if you keep up with your payments according to the plan. The other advantage is that you will not need to raise all the missed payments to make one large payment.
Enable You To Cram Down The Mortgage
Chapter 13 bankruptcy allows you to request the court to reduce some of the debts you owe on particular investment properties to the property's current value. For instance, if you have $150,000 in debt on your investment property and the property is currently valued at $100,000, the judge could agree to lower or cram down your debt to $100,000. Cramdown is only available to investment properties and not residential properties. But, you must raise the entire debt during the debt repayment period, which is the greatest challenge you can face as a bankruptcy filer. If your repayment period lasts between three and five years, you must have paid the entire mortgage and other debts by the end of that period.
Qualifying for Chapter 13 Bankruptcy
Remember that you do not just choose the bankruptcy option to file without ensuring that you meet all its requirements. Thus, it helps to determine whether or not you are eligible for Chapter 13 bankruptcy before choosing it to secure your investment properties.
The qualifying requirements you should know about include the following:
- It would be best if you were up-to-date with your tax filing
- You should have enough disposable income
- You should have a regular source of income to keep up with the repayment plan
- You must be an individual applicant, not a business
How To Keep or Dispose of Your investment Properties in Bankruptcy
Acquiring an investment property takes a long time, effort, and money. Many investors prefer to keep their property after filing for bankruptcy. If that is your wish, it helps to know some strategies you can use to ensure that you do not lose your valuable assets even after declaring bankruptcy. Remember that some situations will allow you to keep your properties if they are considered positive in bankruptcy. But if they appear negative, you will need to dispose of them.
Investors that wish to keep their investment properties after bankruptcy will file for Chapter 13. That is the bankruptcy option that allows you to keep your assets. But it will only happen if you can afford to pay for the properties. Remember that sometimes you could need a mortgage cramdown, depending on the type of investment you have and the mortgage. A cramdown will reduce your debt to the actual value of the investment. But, you will be expected to pay the entire mortgage equal to the current property value within the repayment period.
Investors that wish to dispose of their investment property because they owe more on those properties than its worth will file for Chapter 7 bankruptcy. Sometimes, you could feel better off without a particular investment property because it costs more than you can afford now. In that case, your trustee will have two options: surrender the property to your creditors or sell it off to obtain money to pay some of your debts. When you submit the investment to your creditors, you will automatically discharge the debt associated with that property. When you give back the property to its owner, you can walk away without owing anything to its owner.
How Can a Bankruptcy Attorney Help?
The bankruptcy process is very complex, so navigating it could be an uphill task if you do not have proper legal guidance. A bankruptcy attorney acts as a guide to help you move smoothly through all legal processes until the end of your case. Without legal help, you are bound to make several mistakes that could result in cancellation, or you could give up along the way without receiving any benefits.
A bankruptcy attorney sets your mind at ease even in the most challenging moment of your life. They will be with you from the beginning to the end, helping you remain relaxed regardless of the situation. Your attorney will also explain how the process works, what you stand to gain and lose, and what to expect in the end. With the right legal help, you will not be anxious, fearful, or feel threatened, no matter how grave your situation is.
Your attorney will also ensure that you do not make mistakes that could compromise the desired results. For instance, if you wish to keep your investment properties, an error in decision-making could result in their loss. Proper decision-making entails choosing the right bankruptcy plan to go for. A Chapter 13 plan will help you keep your investments if you can afford them with your current income.
Bankruptcy attorneys are also skilled and experienced in bankruptcy matters. Thus, they offer solid advice that could help you make the best decision for your desired outcome. You can seek your attorney’s opinion even before you decide to file for bankruptcy. It takes a long time for people to decide to file for bankruptcy, even when bankruptcy is the only viable solution for their situation. You can obtain the best advice from your attorney to avoid delays that could sink you deeper into debt.
Your attorney will also handle the paperwork needed in court to kickstart the bankruptcy process. Remember that there are strict deadlines for legal procedures in California. Your attorney will know these deadlines and work hard to ensure zero or minimal delays. Delays in filing or providing some documents could result in cancellation. Also, failing to provide all required documents could delay the process.
Find a Competent San Diego Bankruptcy Attorney Near Me
Do you or someone you know consider filing for bankruptcy in San Diego but are unsure how your investment properties will be handled?
An experienced bankruptcy attorney could help you understand what will happen to your investments based on your chosen bankruptcy option. Your attorney will also help you make the right decision according to your desired outcome. Our San Diego Bankruptcy Attorney team will not rest until you obtain a fair outcome for your case. We listen to your needs, advise, and guide you until they are met. Call us at 619-488-6168 for more information and legal assistance.