Rental property in bankruptcy: Can it be done while remaining current?

[leonel9]

I own a rental home that I purchased with my father. To obtain a modification a few years ago, my father had to quitclaim his name off the title (while still remaining on the mortgage). My goal is to keep the property and continue to make payments using the tenant's rent. Namely because he loaned me the down payment, and renting it out has created equity that can be used to pay him back.

After factoring sales costs and trustee's commission, I expect the property will be abandoned by the trustee in a chapter 7 case. My question is this: Is there a way this can happen without impacting my father's credit?

For example:
- (How) can I use rental income to keep the mortgage current for the months it the bankruptcy will take? Will the bank even accept payments?
- Alternatively, will a chapter 13 solve the problem?
- If so, isn't it true that the value - liens determines the amount to be repaid in a CH13 (which creates a much larger equity amount if it doesn't account for sales costs/commissions)?

I appreciate any help/similar experiences that you may be able to share. I read Des's post on rental property in a CH7, but I wasn't sure if there's been any changes since the post. Thanks!

[despritfreya]

A Chapter 7 Trustee may not summarily abandon the property due to your perceived lack of equity after cost of sale. The Trustee is going to determine if the bk estate can make any money off of selling it. It does not matter if there is no equity. The Trustee may try to cut a deal with the lienholder or the purchaser to get a kick-back out of the sale proceeds. This has happened more than once.

A Chapter 7 Trustee is likely to demand the turnover of every dollar in rents paid post petition. The bk estate is under no obligation to pay those funds to the lienholder unless the lienholder has an "assignment of rents" and has done what it needs to do to enforce the "assignment of rents".

If you wish to "protect" this property you might want to stay away from a Chapter 7. In a 13, so long as you pay to your unsecured creditors the non-exempt value (you are correct - cost of sale, in most cases, is not deducted) over the life of the Plan AND the income generated from the property is sufficient to at least cover all expenses associated with the property you should be able to keep the property. Expenses include mortgage, insurance, property taxes, HOA if any, as well as general maintenance.

Of course, a lot will turn on what state you are in, local procedure and the Trustee, be it in a Chapter 7 or 13.

Your next step, if you have not already done this, is to talk to several bk attnys before making that final decision.

Des.

[leonel9]

Thank you so much for the insight. I've met with one attorney so far and he suggested that if I refinanced to reduce equity I should be in the clear. It wasn't until I read your post on rental properties I thought of the other issues (e.g. rental payments, CBR reporting as delinquent). While this attorney *may* be right, it certainly suggests that meeting with other attorneys is warranted. Thanks again!