Question regarding surrendering investment property

[lolly78]

Hi Folks,

A friend of mine has found himself in a precarious situation. He filed chapter 13 last summer to surrender his two investment properties. He owed way more than they were worth and the property taxes were sky high so he let them go into foreclosure back in 2010.

He didn't have any other debt so that is all that was included in the chapter 13. The tenants remained in the property the entire time, and one tenant is still in one of the properties. These are section 8 tenants so he continued to collect rent until the the tenants moved out one property, and until the bank took back the other.

He got a letter from the housing authority indicating that he collected money he was not entitled to and that he now owes $14K on one property. Throughout the bankruptcy, his attorney he hired, plus one he just met with both told him it was ok to collect the money until he was no longer the owner.

Does anyone know if he can do anything to fight this claim from the housing authority?

Thanks!

[BobMango]

It sounds like your friend continued to collect rent even after the foreclosure? If that's the case and he was renting to Section 8 tenants then I can see what their position is. He would probably be ok if he was just collecting rent from non Section 8 tenants, but since he was collecting subsidized rent, the agency really wants to make sure their funds aren't being funneled to say, a family member. If your friend no longer owned the properties they are definitely going to want that rent money back. He was probably ok up until foreclosure. Not sure how any assignment of rents, if any, on the properties would impact what the housing authority wants but that could be a complicating factor. I would argue that if he did not have any assignment of rent clauses then he was entitled to collect rent until the foreclosure sale, but he's on the hook after that as far as I can tell.

[lolly78]

Well, he stopped receiving the payments after the tenants moved, then the foreclosure sale took place. I would think that the property was still his until the foreclosure was final. The tenants still lived there, and he was still maintaining the property because he didn't know how long it would take until the foreclosure was final. He can prove that he spent at least $4000 on repairs while the tenants still lived there. The bank ended up buying the property back for $7500.

[HHM]

Difficult question to answer.

It probably has more to do with very specific requirements regarding section 8, then anything to do with bankruptcy. So, I don't have an answer. Maybe one of the requirements of section 8 is that the owner cannot fall behind on property taxes?

The issue will probably turn on how he used the money he received. Or perhaps simply filing the BK with the "intent" to surrender is enough to trigger some issue with section 8.

But, I think the issue has to do with section 8 requirements and is, for the most part, unrelated to the BK.

The options would be, (1) fight it out with the state, (2) dismiss and refile (assuming the debt would be considered a post petition debt) to include the debt in the BK, or (3) assuming debt is "pre petition", simply amend and add them as a creditors.