Rental income and questions.....

[cofer22]

Hey all,

So we found a lawyer who'll move our case forward as a non-consumer.

One change in our approach is that we're going to try to go for DIL's for our properties BEFORE we file. I know it's going to be a longshot, but we've got to TRY to avoid BK if at all possible.

We're going to have to default on mortgages to get them to even listen to us. The problem is that we still have tenants. What do we do with the money from the tenants: Do we tell them and have them stop paying?, Take their money and save it then give it back to them once we get NOD. Not tell them anything(take rent and pay other bills).
This is actually one of the reasons I was avoiding short sells, DIL's, or walking away. I just felt wrong about taking rent while I'm purposfully not paying the mortgage.

Any advice with dealing with rental income while "strategically defaulting"?

Jeff

[debee]

I would talk to a CPA to make sure you understand the tax implications associated with property disposition. Depending on the number of rentals, how long you've held them, how they're financed, etc., there will be bad and worse ways of getting rid of them. Aside from Cancellation of debt income, there's probably some capital gain (even when disposing at a loss) and depreciation recapture.

Also, I believe collecting rent and not paying the mortgage is illegal. It's called "rent skimming".

If you're paying any of the utilities for the tenants, you may want to consider reducing the rent by that amount and have them transfer everything over to their own names. I would do that before you tell them anything about your situation because they might stop paying the rent once they find out what's going on but you'd still be on the hook for the utilities.

Do you still have the damage deposit? One option you have would be to stop collecting the rent from them and tell them it's their damage deposit.

It might also be helpful to look into the "Tenants in Foreclosure Protection Act" (or something to that effect) to make sure you handle everything properly and don't end up getting sued. Here's a summary of it, but you can google for more info as well. http://www.nolo.com/legal-encycloped...cle-30064.html

[tcreegan]

Hi cofer,

The rents collected before BK need to be documented as to where the $$ went. Spent on legit expenses. Don't use it to pay one creditor over the others, none goes to family and friends.

The rents collected during the BK actually belong to the trustee as part of the BK estate.

Rents collected past discharge go to the lender. (assuming you didn't reaffirm)

Research the timeline for a foreclosure going through a BK. Copy this down and give a copy to all tenants. Tell them what is up so they can plan ahead.

Well, that is all I can think of, hope some of it helps....

Tom in Colo

[BobMango]

Well I don't know that it matters that much what you do with the rent money before you file, as long as you're not making preferential payments. Money is fungible and just because you derive rental income does not mean it has to be applied against the mortgage on that property. I could no longer afford to pay the mortgage on my rental property in February of 09 but collected rent until my tenants left in August of 09. I used that money to help pay my primary residence mortgage since I was unemployed and the UI didn't cover it. Trustee had no issue, lawyer was not concerned about it either.

[debee]

Rent skimming appears to be law in CA only. Illegal and punishable by up to a year in jail or 10K in fines, but only if the skimming takes place within the first year of ownership. (Cal. Civ. Code § 890 & 892).

There's also a federal law ((12 U.S.C. § 1709-2.), but prosecution seems limited to cases where there is a pattern or practice of purchasing the properties with an intent to defraud and the properties also have to be in default on transfer (as in the cases where scammers trick homeowners in default) or within the first year after. And they have to be HUD, have HUD-insured loans or VA loans. So not the sort of thing that applies to a typical homeowner/investor.

[PushRestart]

I like the responses I read here, they seem to match what my lawyer told me. He said that it is not cool to continue to collect rent and not pay the mortgage, so when I stop collecting rent I also need to refund their deposit.

[cofer22]

Man, this planning part is soo stressfull! I just don't think I can take the tenants money while I'm defaulting. They've been great. Good people. Can't do it.
If I stopped paying and had the tenants stop paying me, would that give grounds to the bank to come after the tenants for back rent? This is assuming that I even try to get the DIL. Is it even worth it going for one of those? Because, from what I've read it seems almost impossible to get one without having to give out financials, paperwork, and agreeing to thier demands. I just want to get rid of these properties quick, while not messing around with the tenants. If they sign the new lease then they'll have at least 90 days upon the new owner taking the house/condo, with maybe more.
Starting to think this defaulting/DIL thing on the rental properties is maybe not such a good idea.