Possible to retain rental property?

[spirityro]

Hi everyone..my parents are considering BK. Probably a ch13 due to income. My question is this...they have a primary residence in NY and a rental property in GA.

Is there any way they would be able to retain both properties? They consulted with an attorney that told them yes but the information sounds incorrect. I've asked that they consult with at least 3 attorneys as is recommended here.

Can the homestead exemption be used on rental property? (All I've read has me thinking not.)

Does the amount of equity matter?

TIA for any information.

[HHM]

Is it possible, yes. It depends on the particular circumstances.

With rental properties, there are two issues. (1) the value of the property (asset issue), and (2) income and expense issue.

In bK, if the rental property has equity (worth more than is owed on the property), then the rental property is toast in a chapter 7 BK. In chapter 13, the debtor can retain the rental property even if it has equity so long as the monthly payments in the chapter 13 plan equal the amount of equity in the property. For example, if the rental property has $30,000 equity, then the chapter 13 must pay at least $30,000 over the life of the chapter 13 plan. In this real estate climate, it is rare for a property to have equity, but it is one issue that must be addressed.

The main problem with rental property is on the income and expense side. The income is factored into the means test. However, usually there is an offsetting mortgage payment so the income side is usually moot. Where you get into trouble with rental properties is on the expense. The property cannot be cash flow negative. That is, the rent received from the property MUST cover the rental properties direct expenses (mortgage, HOA, and any paid utilities). The bankruptcy court is not going to allow the debtor to retain a rental property that is cash flow negative at the expense of unsecured creditors. For example, if the rent being collected is $1,000, but the mortgage and HOA dues are $1,200. The bankruptcy court's position is that extra $200 the debtor pays to support the rental property should go to unsecured creditors.

Now, there are strategies to deal with the above challenges, but in a nut shell, those are the issues with rental properties in BK.

[spirityro]

Thanks so much! This really helps.

[justbroke]

As a person who attempted this in a Chapter 13, I only have three words... don't do it.

HHM is right on the money with his assessment and this was exactly my downfall.