Will I Lose My Rental Property, Vacation Property, Second Home Or Other Real Estate In Bankruptcy?
Unlike your primary residence, other types of real estate that you own generally do not have any exemptions available to apply to them. One common exception to this rule is cemetery plots, which are real estate holdings, and many states have a special exemption just for them. Other real estate holdings, including rental properties, investment properties, vacation properties, and second homes, have no such exemptions to protect them. As such, the analysis boils down to two real factors, is there any net equity in the property and which chapter of bankruptcy are you filing.
Is There Net Equity?
Net equity, as described previously, simply takes the current market value of the property and reduces it by the amount of debt on the property and anticipated costs of sale should the property be liquidated. If the value of the property is less than the total debt against it plus the anticipated costs of sale, then there is no net equity. If the value is higher than the total debt against it plus the anticipated costs of sale, then there is net equity that needs to be considered.
Chapter 7
Chapter 7 keeps this very simple. If there is net equity in the property, then it is likely that the bankruptcy trustee will sell the property for the benefit of your creditors. Your liability on the debts will be discharged, but the property will be lost. If there is no net equity in the property, then you can elect to keep it or surrender it. If you keep it, you must continue to maintain payments on the debts against the property in order to keep it.
Chapter 13
Chapter 13 has more variations available. You always have the right to surrender a property to the lenders against the debt on the property and have your liability discharged. If you want to keep the property, then you actually have more options than you do with regards to your primary residence. This is because there are special protections for lenders on a primary residence found in Section 1322 of the Bankruptcy Code that limit your ability to modify the underlying loans. These protections only extend to primary residences, not to other types of real estate. Your options include:
- Maintain payments – If you are current on the debts against these properties, and you are able to maintain the payments, you can simply do so and keep the property.
- Cure and Maintain – If you a behind on the debts against these properties, you can formulate a Chapter 13 plan that pays the ongoing monthly obligation, either directly or through the trustee payment, and then cures the arrears on the property through the Chapter 13 plan, so the trustee catches up the past due amounts over the life of the plan.
- Cramdown – This is not available for primary residences generally. A cramdown allows you to pay the value of the property with interest to the creditor over the life of the Chapter 13 plan, regardless of how much you owe on the property. For example, if you have a rental property worth $250,000 and you own $350,000 in mortgage debt, your Chapter 13 plan can propose to pay the $250,000 value, with interest, over the life of the plan, effectively discharging the remaining $100,000 owed.
One further consideration is whether the property is deemed “reasonable and necessary to an effective reorganization”. If the property is not necessary for an effective reorganization, such as a vacation property or a rental property that will lose money over the life of the plan, then the trustee may object to you keeping it unless you agree to pay your other creditors more (or in full) over the life of the Chapter 13 plan. The argument is that you should not be allowed to accumulate equity in such a property while not paying your other debts and, honestly, it’s a good argument. This argument is very rarely raised when dealing with a primary residence because of the protections afforded to lenders under Section 1322 and because everyone needs a roof over their heads.
