BK7 VS Foreclosure

[cofer22]

Hey all,

New to the forum. Any insight on BK7 vs. Foreclosure? Is one really easier on you than the other?
I've got 2 rental properties in CO that are seriously underwater, and my main home that is very underwater up here in Idaho. I'm trying to come up with the best, least stressfull method of getting rid of these places.

I'm thinking I wont qualify for a short sell due to NO real hardship. I'd be jumping through hoops for nothing and probably end up in BK 7.
Walking away sounded like a good idea, but you still have to deal with the foreclosure process and quite possibly end up in BK anyway.
Has anybody walked and not ended up in BK?

Any advice or insight would be great. I've been racking my brain for months and need to do something pretty soon.

Thanks
Jeff

[justbroke]

You will need to file Bankruptcy. The nice thing about the Bankruptcy under Chapter 7, is that you can surrender those properties in the Bankruptcy and clear away any deficiency that is created from the resulting foreclosure!

Wait, did he just say "deficiency"? What's that?

Since the properties are investment properties, their foreclosure can bring huge deficiency balances that you would have to pay! The only way to discharge the liability to pay that debt, is through a Bankruptcy!

Lucky for you, your primary debt may actually be considered non-consumer and you should be able to qualify for and receive a Chapter 7 non-consumer discharge pretty easily.

Think of it this way... you'll either foreclose and then need to file Bankruptcy to deal with the deficiencies... or just file Bankruptcy and be done! One hit on your credit instead of two, and the Bankruptcy takes care of all the nasties from the foreclosure!

You should start a conversation (consult) with 4-5 bankruptcy attorneys from Idaho specializing in business (non-consumer) asset protection and bankruptcy!

[tcreegan]

Welcome aboard cofer,

Justbroke has the key point, if the lenders come after you for the deficiencies you end up in BK anyhow.

The house in Idaho is not a problem...Idaho is a "non-recourse" state...meaning you can't be sued for the deficiency.
However, Colorado is a "recourse" state where you can be sued for the deficiency.

Also agree w/ justbroke, a non-consumer Ch 7 would be a neat, clean ending for you. Lot better than 3 foreclosure proceedings followed by two lawsuits for the deficiencies then collection actions to recover the judgment amounts.

Whatever road you take, keep posting, lots of good folks around here to help out !

Tom in Colo

[kodiek]

Good Morning All, We filed chapter 7 and now waiting for discharge. Included is our primary home,severely underwater, and two investment properties under water as well. I know it is the only way to get a fresh start and wish I had started the process sooner. I was in fantasy land that things would turn around but that was not to be the case. I am still unsure of the road ahead regarding foreclosures(3), timeline, responsibilities to properties but know that this is the best and only road to travel. I wish you luck in your decision making. As for me, the agony hadbeen in making the decision to go bankrupt and coming to terms with starting over but once that I filed chapter 7,sleep has come much easier which has made me a much more content and loving person.

[frogger]

I was in fantasy land that things would turn around but that was not to be the case.

Most all of us have been there......

[enuffznuff]

I thought even in non-recourse states (I live in OR, which is non recourse) that only applies to your residence, not to investment properties? (ie, that investment properties are always recourse) Maybe it's different state by state tho.

[cofer22]

Thanks for the responses. I've been thinking BK is the only way to go.. My wife and I actually talked to a BK Attny a few months ago when we were researching our options. He said we'd pass the means test, but our case would probably be looked at as abuse due to having about $1000/mo after everything is paid for. We have no credit card debt, only 1 car payment, and really live by a budget and such. These houses are like ticking time bombs, and I know I'll have to file later anyway, if we don't qualify now. I just want some peace of mind, so I can start moving forward.
We have been trying to figure out a way to qualify for BK so it doesn't look like abuse.

option 1-- Lowering the tenants rent so it eats up all our expendable money
Option 2-- Take on more debt so that our debt burden is higher
option 3-- Quit my job. Which I wouldn't really miss.. ha ha
We were planning leaving this area anyway, if we walked or filed bk. It sounds easy, but it would just start the whole foreclosure/collections process earlier and any money we saved by not paying mortgages could be taken in BK proceedings.

The bk attny was a little ambivalent in the meeting. He said, "you guys are making it work, you should try other options first". I'm convinced that we'll just end up in bk7anyway.
So....
Anybody had to "make" yourself qualify?

What's the difference between consumer vs. non consumer bk?

Are the qualifications any different?

Thanks again
Jeff

[kodiek]

One way that my family passed the means test was to get estimate on all the medical procedures we may need, including dental. Between three of us in a family of 5 we needed several hundred dollars worth a month. We also took our cars in to see what was needed for them, including new tires, brakes, tune-ups etc. This total came to a couple hundred a month as well. Then without the added rental income we qualified for the means teast. These were all legitimate expenses that we needed and had put off while paying the banks all that interest. It feels really good to take care of ourselves, once again. I know the coming months are not going to be easy as we look for a place to live but for our family it is the right thing to do!!!(the only thing to do!!!)

[cofer22]

Lucky for you, your primary debt may actually be considered non-consumer and you should be able to qualify for and receive a Chapter 7 non-consumer discharge pretty easily.!

A couple of questions about this.

How do you determine if you qualify for non consumer vs. consumer?

When I met with the bk attny a few months ago, he never even mentioned it as an option. Is non consumer chapter 7 a completely different procedure vs. consumer?
I'd love to learn more about non consumer chapter 7, as these investment properties really have us by the nards...

Thanks
Jeff

[cofer22]

Then without the added rental income we qualified for the means teast.

Did you stop having your tenants pay, or cut their rent? How did you get rid of the rental income? If we didn't have the rental income, we'd qualify no problem. With even a little cut in rental income we'll be hard pressed to pay those mortgages.

[justbroke]

How do you determine if you qualify for non consumer vs. consumer?

Quite simply, a "simple majority" of your debt needs to be debt that you didn't acquire for the benefit of yourself or family. That's fancy to say that all business-related debt, income taxes, investments and the like are "non-consumer". If that non-consumer debt is more than 50% then you are a non-consumer case (even if it's 50.1%, although some have argued that it needs to be 51%).

When I met with the bk attny a few months ago, he never even mentioned it as an option. Is non consumer chapter 7 a completely different procedure vs. consumer?

Yes. You do not complete the Means Test (Form B22A) in a non-consumer case! The means test is meaningless. Furthermore, much of the abuse provisions in the BK Code (11 USC 707(b)) don't even apply, so you can actually have some significant disposable monthly income (DMI).

I'd love to learn more about non consumer chapter 7, as these investment properties really have us by the nards...

The key will be what the balance on the loans on the investment properties are versus your primary residence! A primary residence mortgage loan is considered consumer. For many debtors, the most significant asset they have is the mortgage(s) on their primary residence, and since that is a consumer debt, it's difficult to get over that hurdle without investment property!

[cofer22]

Justbroke, Dude you rock! Thanks so much for the easy to understand information.

Main house is 260k, Investements = 537k.. So we obviously are over 50% non-consumer. Have you found that Attny's specialize in either consumer bk, or non-consumer bk, because it makes me wonder why he never mentioned it to me. Weird.

[BobMango]

I'd definitely investigate Justbroke's advice. In my own case we had investment property in California that we let the bank foreclose on. Mortgage was $240K and it sold at auction for $84K. Talk about a deficiency balance! At any rate we were in the process of filing Ch7 when the foreclosure happened. Our tenants moved out about a month before the sale. When we filed we notified the bank and the IRS in regards to this property.

On the presumption of abuse arising because you have $1,000 left over after the bankruptcy, I'd say you're not trying hard enough to find allowable expenses.

[justbroke]

Justbroke, Dude you rock! Thanks so much for the easy to understand information.

Main house is 260k, Investements = 537k.. So we obviously are over 50% non-consumer. Have you found that Attny's specialize in either consumer bk, or non-consumer bk, because it makes me wonder why he never mentioned it to me. Weird.

I can only speak make an anecdotal o observation. That is that many "consumer" bankruptcy attorneys first, specialize in either Chapter 7 or Chapter 13, and then, not all of them are familiar with the "special" provisions and caselaw around a non-consumer filing.

One very key point, in determining if those properties are actually "investment" properties will be based on the purpose of the mortgage when you purchased them! If you purchased them as a second home or a vacation home, and the mortgage company included a rider for "second" or "vacation" home, then it may not be considered a true "investment" (or non-consumer) purchase. This is definitely based on caselaw in your particular and Circuit since some Districts base it on the current use and treatment for tax purposes! (Noting that if you purchased it as an investment home, it should have a different type of rider with the mortgage and note.)

I would definitely work with the current attorney to even see if s/he is capable of doing a non-consumer case and whether they will attempt your case as non-consumer.