Rental Property included in Chapter 7

[brighteyes]

We cannot be in the hole when we file. But we are not filing until April, if the loan mod goes through then we'll come current, if not it's going into the bk. I have heard of people who have included the house in chapter 7, then after dismisssal the banks ask for a loan mod and we are open to that option. Like I've said before, either outcome is fine with us. I'm wondering if the outcome will be different since we do plan on moving back to the home if we get to keep it. Like i said my heart is not set on keeping it. Thanks for all of your advice. I wad just trying to see if therewas something i could do to keep people from calling and stopping by. I dont want my tennants to be inconvienced, or at least keep it to a minimum.

[brighteyes]

It wouldnt let me edit my post but i wanted to add a few things. We rented out the house to do what we thought was right. We felt obligated to pay the.mortgage that we took out. In the end it screwed us. We owe about 500k and it is worth 275-325k. The bank can have the 5 diget loss. We qualify for a 7 due to the amount of taxes that we will owe this year and the fact that we are supporting two houses. One on cali (super ezpensive to live here) and the one on az.

[despritfreya]

we are supporting two houses. One on cali (super ezpensive to live here) and the one on az.

Brighteyes,

I have picked up on something that may or may not be an issue. Your initial post states that the home in (as we now know) Arizona was your residence until February 2010. You then apparently moved to California and have been renting the Arizona property since then. Have you discussed with your California attorney the fact that you may not have been "domiciled" in California for the required 2 years and, therefore must use Arizona exemptions? I can tell you that if you are required to use Arizona exemptions that money you have been holding for the mortgage IS NOT exempt.

If you have not already done so, you need to verify what exemptions you can use BEFORE you take the leap into the 7.

Des.

[justbroke]

1. The assets which includes the real property AND any rents it generates AND the lease are property of the estate until the Trustee abandons them. There are three assets here.

I know this to be true from experience. When in my Chapter 13, my rental receipts had to be turned over the the Chapter 13 Trustee. The Trustee and I agreed that I didn't need the tenants to directly pay the Trustee, which is what I wanted, and that I could pay the "rents" directly to the Trustee outside the wage order. (I actually had a hearing on this before the judge.)

Whether a Trustee will actually care about the property or not, is a different thing. In any event, the right to collect rent belongs to the Trustee until they abandon the property from the Estate. I have read countless cases where the Trustee assumed leases and continued to operate a rental property... even if they were going to sell it.

[debee]

I think OP will have to use the federal exemptions since she's not domiciled in AZ.

EDIT: brighteyes, the problem with your rental in AZ is that you want the court to cancel your other debt - let's say some credit card - that you could actually be making payments on if you surrendered the AZ rental and let it go to foreclosure.

Even if you are current on the AZ mortgage when you file, you won't be able to keep it in a chapter 7 because there is a monthly operating loss. In order to determine whether you qualify for a chapter 7, you have to run your numbers without the rental income/expense.

Also, what do you mean when you say a tax debt will help you qualify for the chapter 7?

[brighteyes]

I cannot claim Cali exemptions nor can i claim Arizona exemptions. You have to physically live in Arizona to take their exemptions so i have to go with federal.

[despritfreya]

I cannot claim Cali exemptions nor can i claim Arizona exemptions. You have to physically live in Arizona to take their exemptions so i have to go with federal.

Thank you for clearing that up. Something I did not know.

Des.

[brighteyes]

Here is our situation in a nut shell

Okay, I've been asked to give as much information as possible. I've been making answers short and sweet because I know (on other boards) you make them too long and people complain....

1.) We bought the home new Arizona in 2004 and lived there up to 2/2010.

2.) DH company was downsizing so he jumped ship before he was let go and we moved to Cali (he moved 11/1/2009 and I followed late Jan.)

3.) We have lived in Cali since then, but have not changed over our licenses, car registration, or voting. We do have our mailing address as Cali, as well as DH's job location and kids' pre-school

4.) We did everything we could to rent out the house because we felt obligated to do so, even knowing that it would be a negative money maker, but we knew we would get the tax right off. WRONG!!! DH makes too much money to claim it as a loss on taxes. I guess it's money rolled over (for up to 5 years, correct me if I'm wrong, cuz it could be 3 years) until we sell or make less (never going to happen, unless he looses his job for more than 6 months). We are going to end up owing about 20k this year and have no clue how we are going to pay that back! We have consulted our tax accountant and a tax attorney and they have both said the same thing.

5.) We have tenants in there that are the best tenants. Pay rent on time, clean, quite, white collar working family that bought their house at the wrong time and wrong place (who buys a house in Laveen, AZ?). They have a lease until 2/1011 and we have given them the option to break their lease at anytime and there will be no ramifications (in our lease it states that if they break the lease they will have to pay all monies due up to their end date of the lease.)

6.) DH has switched jobs, yet again, and is moving back into sales and a much better company. This jobs gives us the freedom to live anywhere and we would like to get out of Cali and move back to Arizona, preferably sooner than later. When we realized this, we wanted to move back to our home. The more we thought about it the more we questioned our reasons why we wanted to move back to that house. It's huge (4700 s.f.), upside down by about 175k (regular sale)- 250k (short sale) the 1st is $348,000 at 4.5% for 30 years FHA with about 12k more for missed payments and late fees the 2nd is 154k 0% interest 30 years fixed conventional loan and we don't start paying on that until 5/2012, and it was suppose to be a flipper to make money but babies came into the picture and we decided to stay. Our loan has been touched by every bank that has been sued in the last couple of years. Countrywide, World Savings, Wachovia, and Wells Fargo. I know that there is/was issues with our loans and I don't know if I have the strength to fight those issues. Here is a link to the Assurance between Wells Fargo and the State of Arizona http://www.azag.gov/press_releases/o...0Agreement.pdf Plus I have lost some of our loan docs from previous loans. I tried calling the broker we used and he gave me the run around, saying that his previous employer, owned by two guys, got in a massive fight and locked up all of the servers and no one can retrieve any of the info. Kind of fishy to me. Where else can I find these loan documents?

7.) We have not paid our mortgage since 10/2010, per a Short-Sale/Foreclosure Attorney in Arizona (paid a 350 consultation fee). She recommended that we short sell, but we would be liable for the second mortgage since we had refinanced a few years prior and took out some money, about 40k, to finish up the yard and some home improvements. I know that we could settle the 2nd for pennies on the dollar, but we have other debt.

8.) I talked to a lawyer (or five) about our options and we qualify for 13 and 7. We are scared to death about the 13 since DH will be working on commission and has the opportunity to make a lot of money and he will, its just the nature of the field he is in, and we don't want to have the black mark on our record and still get stuck paying back all of the money. With a chapter 7, we don't have to pay anything back and really have our slate wiped clean. We have to wait until April for a bonus to fall off, but can't file much later than that because our house is on the Sheriff's sale list for May. Also, DH will be receiving commissions soon after the 341 meeting, if all goes planed right.

9.) I have settled about 8 CC for 20% or less and have 3 more totaling over 50k. I have received all my 1099's but we are insolvent, so I'm not worried about having to pay for that income earned. One will be in default on Monday, we were served papers August 2010 (long story and screw ups from all three sides, judge, plaintiff, and defendants), unless our lawyer called the other lawyer last week. Another long story short our lawyer knows the other lawyer and have been friends for over 20 years. This would be a favor, but our lawyer feels it won't be a problem.

10.) Regardless of what happens we will be moving back to Arizona by the end of August.

Here are the options that I have debated, researched, and re-hashed in my head for months:

1.) Go the Chapter 7 route and just let everything go. Simple, easy, and not very complicated.

2.) Go the Chapter 7 route, try one last time to save the house by modifying our current loan either prior to the Chapter 7 or taking the chance that Wells will ask us to modify after the discharge and then when the 2nd comes due, default and then settle. We would still be insolvent at the time since our house is so upside down.

3.) Chapter 13, lien strip, remove CC debt and live on the edge of our seats for 5 years knowing that our payment could go up at anytime.

4.) Short Sell our house and pay the settlement on the 2nd. Settle our CC debts and move on from there. This would require taking a loan from our 401k for a short period of time, since I don't have that kind of money sitting in the bank.

I know this is a long post, but now you have almost all of the info, I may have left some out unintentionally due to the length of the post.

[debee]

I don't think things are as simple as you think they are.

The rental property loss is not included in the means test. You can't subtract the $500 from your other monthly income. You also can't count it on the schedules I/J in the actual bk filing. That means you have $500 right there to pay your creditors in a chapter 13 plan.

Another possible trouble spot for you will be this: If you do not pay the expenses associated with the rental prior to filing, you will not be able to claim those expenses on the means test, but you will have to claim the income. You can only claim nonstandard expenses on the means test to the extent you actually paid them. This added income without an expense to counterbalance it will likely disqualify you from filing chapter 7.

A chapter 13 would prevent you from having to pay interest and penalties on the income tax debt. You could divide the total owed into 60 months and pay it off that way. When you include the IRS debt as a chapter 7 expense, you need to break it into 60 payments. That's what the UST will do when they review your schedules to see whether or not you can fund a chapter 13 plan.

You'll want to discuss with your attorney the commission thing and whether or not it will be considered "earned but unpaid income" at the time of filing. (EDIT: If it's considered "earned but unpaid" at time of filing, you will need to try to exempt it if you want to keep any of it.)


I think when you lien strip an investment property you have to pay the entire amount stripped within the 5 years of your plan. Otherwise, it's not an option. Someone else will come along and correct me if I'm wrong.

It sounds like you have had multiple free consults with attorneys, but haven't paid anyone to really go over your case. If it were me, I would do that now.

Good luck to you.

ps. Your tax attributes (loss carry-forwards, etc) will become property of the bankruptcy estate when you file.

[brighteyes]

Rental property loss? Meaning what? The amount I go in the hole every month or the amount of the loss carry-forward? All of my expenses associated with the rental property are paid up. I am not late on HOA, taxes, insurance, or any other duties. Just the mortgage. I have to pay all of those until Wells gets the mortgage is out of our name, right? Once Wells gets the mortgage out of our name, we are about $11 in the positive every month.

The mortgage was not taken as an investment loan, it was for our primary residence. If we choose or can go through with the Chapter 7 keeping our home is there something we can do or say to let the Trustee know that we will be moving back to that residence and have every intention of keeping the property as our primary residence, we are just letting our tenants finish their lease? I mean we would already be in Az., but they don't want to move until their lease is up.

[debee]

Rental property loss? Meaning what? The amount I go in the hole every month

Yes. You can't claim this monthly operating loss as an expense on the means test or on schedule I/J.

I have to pay all of those until Wells gets the mortgage is out of our name, right? Once Wells gets the mortgage out of our name, we are about $11 in the positive every month.

If you only have $11 DMI from your schedules I/J when you don't include any monthly expenses relating to the AZ property, then you do qualify. Are you sure all your expenses are allowed and would be considered "reasonable and necessary" by the UST? You should post them in a new thread and get some feedback because as an over-the-median filer your expenses will be examined under a microscope.

Most people who surrender property in bk and receive a discharge don't pay the property expenses while waiting for it to change hands. Property tax attaches to the land so if you don't pay it, the county will get a lien on the property and that will be satisfied when the lender sells the house at auction. Once your landlord's insurance policy expires, the lender will place a new policy naming themselves as loss-payee. Some people elect to keep their properties insured through foreclosure because of personal liability issues like "slip and fall" accidents. HOA from what I understand can follow you so you'll want to pay that.

The mortgage was not taken as an investment loan, it was for our primary residence. If we choose or can go through with the Chapter 7 keeping our home is there something we can do or say to let the Trustee know that we will be moving back to that residence and have every intention of keeping the property as our primary residence, we are just letting our tenants finish their lease? I mean we would already be in Az., but they don't want to move until their lease is up.

The AZ house is a rental now regardless of how it was financed. I don't think it will matter what you say you "intend" to do since that's all in the future and speculative. Law = same rules for everyone.

The trustee will abandon it at some point because it's upside-down. You will still be the owner, but at what stage will you be in the foreclosure process by then? Or will the foreclosure take place while the trustee is still administering the asset?

Also, in your previous posts you speak as if you had the option of a 7 or a 13, and that makes me think you might not understand this process as well as you think you do. $11 DMI isn't enough to fund a chapter 13 plan...

[brighteyes]

I'm back.

Things have changed a little and I'm so confused. We will not be returning to Arizona and we will be letting the house go. Our tenants are becoming a PIA because notices have been sent to the house that shouldn't have been. Something about having to be approved by HUD to continue to live in the house after the foreclosure. They still haven't sent me the paperwork.

What do I have to tell them, legally, about the BK?

Since we are letting the house go, and from what I have learned the rents will no longer be ours. Therefore, that income will not be included in the means test for the chapter 7, correct?

I send emails to my lawyer and he does get back to us promptly. But I'm wondering if I should just schedule a meeting before signing the papers, to make sure we are on track and that all of my questions have been answer.

[debee]

Since we are letting the house go, and from what I have learned the rents will no longer be ours. Therefore, that income will not be included in the means test for the chapter 7, correct?

If you collect any rent in the 6 months prior to filing, it counts as income on the means test.

As for the tenants, there's no legal requirement to inform them that you plan to file bk. Since their lease is up, I don't think you have to worry about informing them of the foreclosure either. If it were me, I would read up on the AZ landlord/tenant act, and any new legislation governing landlord/tenants & foreclosure just to be safe. You don't want to get sued.

Even if you're not legally required to let the tenants know what's going on, you might want to tell them anyway. No one likes having the carpet pulled out from under them.

[jasymoice]

This will inform your lender mortgage that you intend to give the property back & helps the lender select how to proceed. Your lender may attempt to negotiate a loan modification, but this should be discussed in detail and your bankruptcy attorney before signing any contract of loan modification.