rental properties = business loss = ch7 ?

[Tom_Mi]

Hi All,
I'm trying to get to the bottom of a quote I've heard before. The quote goes like this:

"Your investment properties... (4 apt buildings)
are business losses.... (but the apts are in my name, not an llc),
so you get to be a CH7". (implying no means testing)

The above confuses me, because my atty has me thinking I still have to pass means for a CH7.

So, what's the TRUTh behind this whole "rentals = busness loss = ch7" idea?

oh...I'm in Michigan.
-t

[uofaguy]

Tom - if the majority of your debt is business/investment debt (e.g. rental properties even if mortgages are in your name & not via a corporation) and not personal/consumer debt (e.g. a mortgage on your primary residence, credit cards, etc) - then the means test does not apply to you. This was exactly our situation. Note, however, that you still have to complete Schedules I & J.

[soleprop]

FWIW, you still need to "complete" the means test, just not all of it. someone filing nonconsumer CH7 in MN needs to complete the top portion, indicate the presumption does not arise, and then the MN district trustees/court want you to fill in the next page worth as well even though the directions on the means test say not to. and then sign it. so you can't just not do the means test. granted, it sounds like MN requires an extra bit of work on the means test for nonconsumer CH7 filers (i haven't heard/read about any other states requesting this).

what you guys are actually trying to get to the root of is the presumption of abuse - if your debts are primarily nonconsumer (50% or more) then the presumption does not arise and a portion of the BK code does not apply (707b i think) and therefore your case cannot be considered abusive according to the stipulations in that particular section of code.

[Tom_Mi]

THANKS GUYS!

my concern is that I make just under means here...79k

but I got a 10k tax refund

and took in another 9k in rents that didn't fix my huge vacancy/maintenance problems, but still adds to my income

....so I'm WAY over means....and SCARED TO DEATH to file 7 with all this income.


My atty said I might have to reaffirm my house just so my mortgage would offset the above income, because she's convinced I still have to come in under the median.



Note, I'm not trying to get away with anything, the rents go away after CH7, and I'm fine with that.

[uofaguy]

Tom - I was also WAY over the median income for my state or allowances under the means test when I had one done before I knew it wasn't applicable for our situation (maj. biz debt).

My primary residence mortgage certainly helped on my schedule J (as I had a large mortgage payment) but I DID NOT reaffirm this mortgage and did not have any issues with my BK case (and my lender allowed a ride-through; i.e. if I continue to make payments they will accept w/out a reaffirmation). My understanding from this board is that different districts vary on whether the BK courts allow a ride-through.

I am so passionate about this b/c of all the bad legal advice I got when I started this last year. I'm sure I am starting to sound redundant, but I would strongly encourage you to speak to a few other business BK attorneys just to ensure the advice you are receiving is accurate for your district/situation - even if you have already hired an attorney.

It took me many consultations (8-10) before I found an attorney who I felt adequately understood the law as it related to my case. In my case, my attorney's only reservation was that b/c of my high income, I might have an issue with the Trustee (as there hadn't been a Biz BK case in our district at the time with a filer having income at my level) - - however, I was discharged no problem and I have to assume given the continuing real estate fall out others are in the same boat & have/are starting to file. Some on this board have mentioned that you might want to ensure your schedules I & J are relatively close. Don't lie - just ensure you capture every relevant expense so you don't have a huge gap between the schedules. Not even sure if this matters, but I would err on the side of caution.

Also, your case may get extra scrutiny so be prepared to turn over tons of documentation. Feel free to PM me if I can provide any specific info or if you want to discuss more personal BK issues. Good luck.

[Tom_Mi]

You are a godsend. I'll make calls now. I will ask specifically for knowledge of "non-consumer chapter 7" requirements, and experience with largely real-estate losses.

My attorney hasn't been paid a retainer yet so I can do this. She's a really nice lady and is well-known in town. I think she just
-Doesn't do much with real estate
and
-Doesn't like to rock the boat with the Trustee (this is my real concern)

THANKS AGAIN!!


One last follow-up question: (you can ignore my similar post in the foreclosure area)
It's been said that if I don't file before the bank sells and gets a judgement against me, the unsecured nature of the judgement could hurt my "business loss" argument.

But I'm not so sure. Yes, its unSECURED, but it's still not CONSUMER debt. Wouldn't it still be a loss due to a failed business, secured or otherwise????

[uofaguy]

Tom - unfortunately, I don't have the answer to your last question (what is the status of the debt if the homes sells & you later get a deficiency judgment?). Your reasoning makes sense, but I don't know.

My situation may have been slightly different in that once the banks foreclosed and if they pursued a deficiency judgment, I would likely no longer have had a majority business debt and would have been forced to include the means test (bye bye Ch. 7 BK, hello Ch. 13).

My understanding is that it if no one else meets the minimum bid at foreclosure auction, the bank often buys the home back for what is owed on the first mortgage (assuming 2 mortgages like mine). Assuming they did that and then the 2nd mortgage bank came after me, I would no longer have qualified for a Ch. 7.

Example: assume 1st mortgage = $400k, 2nd mortgage = $100k. Home forecloses & 1st bank buys back for $400k. I then get a $100k judgment from the 2nd bank - - well, all I have now at best is $100k of biz related (unsecured) debt - - not the $500k total biz debt & in my case I would no longer have had a majority biz debt because I had a primary residence mortgage (consumer debt). Rather convulated, but something else to think about if you are in the same boat.