rental property

[smith2b555]

Has anyone kept their rental property in a chapter 7?

My primary home has about 10,000 in equity (plan to exempt)
My rental is in the red with equity. I pretty much break even on the it after making my mortgage payments, insurance and taxes. I want to keep it because my disabled parents live there. My dad does all the up keep so it does not cost me anything and I just keep the rent low for them. They have a few issues so I don't want them to have to rent from someone else and I don't want them to live with me.

I pass the means test with negative DMI of -$51.
Will a trustee force me to give up this property? I have read that they don't want you to keep additional properties (investment). It is not worth anything but piece of mind for me with my parents.
Will they consider this an undue hardship on me?

[angles]

if it does not cost you anything to keep (essentially breaking even) then it should not be an issue. If he asks about it, you could go deeper and explain that your disabled parents live there and you need to take care of them as best as possible.

We filed and have a rental property that is underwater that we are keeping. Our paperwork shows that it has negative income once expenses are paid and the trustee did not say anything about it (not yet anyway). But we may be in a different situation since we filed under non-consumer.

I take it you are a consumer filer?

[tcreegan]

Hi smith2b555,

Will a trustee force me to give up this property?

I don't think they can....and seriously doubt they would want to...it has no value for the BK estate.

If you got the rent and expenses in the right places in your filing, the only issue might be the lender wanting a reaffirmation and the court not approving it. But even this is probably not a problem anyway, several ways to handle it.

Glad you are helping the folks out!

Tom in Colo

[smith2b555]

Thanks for everyones answers. I have a consultation on Wednesday. I am filing as a consumer. I never intended to rent that house for profit. I was going to sell it and buy another house years ago. Then when my mom and dad started having trouble I rented to them. They have been there 10 years.It was easier on all of us. I didn't have to worry about selling and they didn't have to worry about expesive rent or landlords. Will having the rental make me a non consumer filer? I'm not in the business of renting houses and we have no formal renting agreement. They live there, maintain the house and give me money to cover mortgage payment. No contract or anything. I don't consider it an investment property really. If for some reason my mom and dad moved out.(which they have no intention of doing) I would sell it, not rent again. This whole process has my nerves on edge. I feel bad to file. I have a ton of CC debt and medical that is just dragging me down. I can't pay everyone. The tip of the iceberg was my son's surgery a couple months ago. 30 grand for appendectomy. Insurance has covered some but not all.

[tcreegan]

Hi again smith2b555,

Since there is no corporation, LLC, or other type of business I don't think you can go non-consumer. I think you are consumer all the way.

I hear you on the medical, that is what did me in. I went out on medical leave the first thing they did was cancel my medical coverage.

Hope your son is mended and doing fine by now,

Tom in Colo

[smith2b555]

Thanks Tom,

Yes , my boy is all mended and doing great.

Julie

[angles]

Glad to hear your son is doing well Julie - that’s what is important.

To be considered a non-consumer filer your business debt has to be 51% or greater of your total debt. Your rental property IS considered a business. So, if you owe 100K on your rental, 25K on your home mortgage, and 25K on CC then your total debt is 150K and your business to consumer debt is 66% making you non-consumer eligible. One thing to add, if you have CC debt and part of that was used for your business (purchasing parts, making repairs) that counts as business debt and has been supported as such by the courts. The CC’s obviously don’t like this since it defeats what they pushed for in the 2005 BK law changes.

[smith2b555]

angles,
I owe 116K on my home.
60k on rental
30k CC (not used for rental)
10K medical
That makes me consmer right?

[justbroke]

A couple of clarifications. To be a non-consumer case, you only need to have a "simple" majority of your debt being non-consumer debt. So that means, in the overwhelming majority of Districts, just 50.00001% and you're a non-consumer case. In the majority of jurisdictions, your primary residence is a consumer debt. Some jurisdictions will give you a hard time with investment property if it was purchases as a second or vacation home.

Additionally, this non-consumer debt doesn't need to be associated with an LLC, S-Corp, Corporation, or any recognized business organization. Many middle-class debtors actually are business owners, since they rent an investment property and report that on their Tax Returns annually.

angles,
I owe 116K on my home.
60k on rental
30k CC (not used for rental)
10K medical
That makes me consmer right?

Yes, that makes you a consumer.

[debee]

My understanding is that rental properties are only business debt if you bought them as 'rentals' in the first place. If you converted a former principal residence into a rental, then it would still be consumer debt. I would love to be wrong on this.

I wonder whether the trustee would take issue with your breaking even on the rental property and charging below market rent to relatives. If you were to charge fair market rent, you might be making a profit and then be able to pay some creditors.

[justbroke]

My understanding is that rental properties are only business debt if you bought them as 'rentals' in the first place. If you converted a former principal residence into a rental, then it would still be consumer debt. I would love to be wrong on this.

This is really District specific. The majority of Districts will deal with it based on its usage and how you have been treating it. The more Tax years in which you treated it as a rental, the better. Others are much more strict and treat the mortgage on your "rental" property as such, if you purchased it as a rental property.

I wonder whether the trustee would take issue with your breaking even on the rental property and charging below market rent to relatives. If you were to charge fair market rent, you might be making a profit and then be able to pay some creditors.

The Trustee wouldn't care about market rent unless this would actually improve the person's DMI, but you do bring up an excellent point. There are actually other costs involved with owning a rental, which go well beyond PITI (principal, interest, taxes, and insurance). Even so, if this is a non-consumer case, the DMI won't matter that much, and can be quite high!

[angles]

yes, consumer. you are 27% business debt. BUT, if you were to switch homes making your rental your primary and your home a rental, then you would be at 53% business debt making you a non-consumer. something to think about for planning purposes.

[justbroke]

yes, consumer. you are 27% business debt. BUT, if you were to switch homes making your rental your primary and your home a rental, then you would be at 53% business debt making you a non-consumer. something to think about for planning purposes.

That doesn't work in all Districts. Most Districts require the debt itself, read the promissory note, to have been initially signed as though it were investment property. That means, that there should be an rider attached to the mortgage and note, indicating that it is neither a vacation nor second home, and that it is an investment property. Some courts only look to see how it was last being used.

[debee]

If you check out the US Trustee Program's website (www.justice.gov/ust/eo/bapcpa/) you can download and read the USTP's position on legal issues arising under the chapter 7 means test. One of those positions relates to non-consumer debt & states: "Purpose of debt is judged at the time the debt was incurred".

[debee]

Here is an example of a thread wherein the trustee was neither abandoning nor selling an underwater property. Instead, he was collecting the rents. He held onto the rents which forced the debtor into foreclosure.

" So TT sent us this about our rental property" posted by badkarma