Paying it FORWARD

[bf2bf]

I don't know if this came up before...

Say you're renting part of your home. The lease expires on May 1st and is paid up to that date.

Two months before the lease expires, the tenant tells you that although she doesn't want to renew the lease, she would like to stay for another 10 months after May 1st and is willing to pay ahead of time, but only for 9 months and get one month free.

So you agree to this and collect the 9 months worth of rent on March 1st. So at this point, she's all paid up through Feb of next year. This March lump payment is the last of the moneys that you ever get from her as she moves out at end of the 10 months in February.

You file Ch7 in October, 7 months after receiving the last lump sum rental payment. In the meantime, you used this money for necessary repairs to the property and other expenses.

How will these funds be treated. Would they have to be included in any of the schedules and how is the rental handled from October to February although there is no further income from it.

And, does filing in March of next year, changes how all this is reported and handled?

I know it may be confusing to some, so let me know if you need clarification on any of the points.

[music12]

you are not confusing, the situation is confusing! basically you are asking whether you are supposed to apply the rent pro-rata monthly, so that it's considered income over the past 6 months, or can you leave it out of the 6-month income schedule simply because it was paid in a lump sum.

hmmmm. it's a tough one. it does not seem to be an obvious problem to leave it out, but the trustee may notice the discrepancy between last year's tax return (which presumably includes the rental income) and the 6 month income which would seem very low in comparison. the trustee may then ask you whether you are still renting out that part of your home, for which the answer is yes. then it would look very weird that you had this deal with your tenant where she paid you 9 months in advance (what tenant these days has 9 months of rent lying around i really don't know) and you filed just when the lump sum was 7 months old. further, you used the money for repairs on a home that you are actually keeping (i presume).

if this rental income could push you from a 7 to a 13 and you get a trustee who is not so overworked as to overlook the discrepancy with your tax return, you could end up with a 13. on the other hand, you might not get a very alert trustee in which case you could manage the 7.

so as i am writing this, i think you could just try it, and if it doesn't work go for a 13. i do get the feeling that the situation smells a bit like cheating (i think a trustee might be very annoyed if they realize it), but some people would just call it "bankruptcy planning." some of the reason it smells a bit bad is that it's very difficult to believe that a tenant would offer a lump sum of 9 months - it's too crazy to be believable.

so that's my 2 cents!

[bf2bf]

music12,

Thanks for your input.

The above situation is strictly hypothetical at this point.

However, a renter did offer an 11 month lump sum payment for one year lease couple of years ago, when BK wasn't even in the picture.
It works out to over a 10% after tax return on the money and is actually a pretty attractive deal if the tenant has money in the bank earning 2%.

Obviously we're renting out because of necessity not because we want to or have the extra room to spare. Our little one is already realizing that he's living in a closet-sized room and is asking me if I can move the walls to make the room larger. It is heartwrenching.

Because of that and because this extra income no longer makes much difference in reducing the negative DMI, we decided not to rent any longer.

The lease will expire before we file and I already notified the tenant that it will not be renewed; she was not very happy.

And now I'm thinking, if she indeed offers to pay forward and gives a lump sum, should we agree and how will this affect the filing.

Yes, we're keeping the house and the money will be used for desperately needed repairs and medical expenses, so I don't see a problem with "what did you do with the money?" question from TT.
Are you saying there is a problem using the money on repairs of the house we're keeping? Conservatively, the house is "under water" by about $20,000 and possibly as much as $70,000

The tax return discrepancy will be there anyway, due to a large decrease in overall income starting midyear this year.

If the TT asks, the reason/justification for wanting to be paid in advance would be true, to take care of the necessary home repairs. Otherwise, we would no longer rent.

As far as waiting 6 or 7 months to file, that would be really coincidental to this advanced payment (although it may help make it a non issue), since it would take us at least that long to plan and prepare to file, regardless of what we do with this lease.

So, if someone had similar situation or has knowledge or other ideas on how this should be handled in BK and how TT may view this (if at all), please let me know.