Our journey into bankruptcy started in late 2003 when we decided to diversify out of stocks and bonds and into real estate investments. We employed a buy-and-hold strategy with properties in different locations with diverse economies. We ended up with about two dozen “doors” and many mortgages. We financed the purchase of the real estate investments with the second mortgage on our house.
Initially we were close to break even, after taxes, with an expectation of good positive cash flow and substantial equity by 2010. We also looked at these investments as a great investment portfolio to pass onto our children. We had always understood that there was a housing bubble and values would drop but everything we had read told us that the rents would hold. We were not prepared for a combined housing and credit collapse. We had no idea the extent of mortgage securitizing that occurred all over the world and how it had weakened our financial institutions. Nor were we prepared for the pro-bank remedies the US Federal Government would enact.
Initially we tightened our belt and deferred any expense we could. I still have a job so we used that income to pour into our investments to wait out this recession. We held our own for a while but there was no money left at the end of the day. Unfortunately, vacancy rates started to increase and rents dropped due the economy and due to an increase in the number of available rental properties from others trying to avoid foreclosure. We now started losing significant money and started increasing balances in the business credit cards associated with each rental property.
We initiated discussions with the mortgage holders to modify our loans. That was a massive waste of time. Huge hours put into this effort with little or nothing to show for it. The only banks that were serious were those that had a large number of mortgage loan origination violations. They only offered us loan modifications if we agreed not to sue them for their past loan origination violations. We continued to bleed out red ink.
Then B of A contacted us. During the consolidations in the financial world, they had obtained an additional mortgage and two additional credit cards of ours. They informed us that we now exceeded their policy for debt to income and they were freezing the credit cards. They reported this to the credit companies as an adverse action. Subsequently, CC interest rates increased by at least a factor of five and we quickly found ourselves losing thousands of dollars a month.
Mortgage modifications continued to be denied or of little value. One mortgage holder forced a short sale of one of our properties to another investor for half of what we paid for it yet they would not offer us a mortgage modification. If they had reduced our mortgage balance to the sale value, reducing our monthly payment, we would have had a positive cash flow property. Unfortunately, the banks make far more money for their shareholders and officers by foreclosing or short sales than by helping out the original owners. Thank you Uncle Sam.
By late 2010 we started looking into other options including bankruptcy. The tax ramifications and financial liability associated with foreclosure and/or short sale was staggering. We talked with a lawyer in early 2011 to see what options we had. The bad news was we only had one option, Chapter 7 bankruptcy, but the not-so-bad news was that we easily qualified for non-consumer BK7 which was relatively untouched by the changes made to the bankruptcy laws in 2005. (i.e. no means test, DMI, etc).
Our initial reaction was denial followed by anger, fear and eventually acceptance. Our dream, of real estate investments supporting us in retirement and providing for our children after we pass, was gone.
By late spring of this year we started planning for entering into non-consumer BK7. This included working with our lawyer, a CPA and a retired trustee plus surfing this website. We took care of long overdue repairs to house, pool and cars, filled the pantry, got appraisals on all remaining real estate properties, home and cars, paid insurance, HOAs, mortgages, etc, increased insurance coverage where possible, quit using CCs and converted to a cash economy only.
New accounts were opened in banks where we do not have mortgages or CC. Exemptions should cover the cars and any cash left in the accounts. All real estate properties, with a few exceptions, are underwater. Those properties not under water barely have equity after you consider closing costs. Our home is below water. It is not clear whether we will be an asset or no-asset case.
Consistent with this website, our lawyer is emphatic that you do not reaffirm any mortgage or the car loan. Our lawyer has put us in contact with an “expert” in getting lien adjustments during the BK process but if we don’t get any lien adjustments (information from this website suggests we won’t) and if the property is not solid positive cash flow, it is gone. (The rents have held up in a couple of places so we have positive cash flow from them but the property values have dropped so we owe way more than the appraised value.)
Assuming none of the rental properties survive, we would be left with a first and second mortgage on our house and my income will just be able to support us. (At least both mortgages will be non-recourse.) It will be like starting all over from the beginning which is what the BK process is all about.
A big unknown is what will happen to the rent money during BK. Our intent is to exempt all rental properties and it is our understanding from court cases that trustees are only allowed to collect rents if the properties are non-exempt. However, we recognize that the trustee has significant latitude and may want the rents. Based on experiences discussed on this website, we may not get any rents as the tenants may quit paying. Our lawyer has told us, in the absence of instructions from the trustee, to proceed using the rental income as we have done in the past (pay property management, HOA dues, insurance, mortgage, etc) but not to put any of our money into any property. Conversely we are not to use any of the rent money to pay our living expenses. All rent money must go into the properties.
Another open question is our tax refund for 2011. Not sure what the trustee will want to do. Our wild card exemptions will not cover it all. Due to depreciation of our real estate properties we have always had a large refund. Depending on how and when the properties are disposed of in BK we may or may not have a large return for 2011. (BTW: we do have receipts for how we spent our 2010 tax refund.)
Right now we look at the bankruptcy process as a federal program protecting us from a failed federal housing program. When all is said and done, the BK process will change that proverbial “light at the end of the tunnel” from an on-coming train to daylight. Unfortunately, we are still in the tunnel and while we have come a long ways we still have a ways to go.
We recently filed: September, 2011
I will update this story as events unfold.
Initially we were close to break even, after taxes, with an expectation of good positive cash flow and substantial equity by 2010. We also looked at these investments as a great investment portfolio to pass onto our children. We had always understood that there was a housing bubble and values would drop but everything we had read told us that the rents would hold. We were not prepared for a combined housing and credit collapse. We had no idea the extent of mortgage securitizing that occurred all over the world and how it had weakened our financial institutions. Nor were we prepared for the pro-bank remedies the US Federal Government would enact.
Initially we tightened our belt and deferred any expense we could. I still have a job so we used that income to pour into our investments to wait out this recession. We held our own for a while but there was no money left at the end of the day. Unfortunately, vacancy rates started to increase and rents dropped due the economy and due to an increase in the number of available rental properties from others trying to avoid foreclosure. We now started losing significant money and started increasing balances in the business credit cards associated with each rental property.
We initiated discussions with the mortgage holders to modify our loans. That was a massive waste of time. Huge hours put into this effort with little or nothing to show for it. The only banks that were serious were those that had a large number of mortgage loan origination violations. They only offered us loan modifications if we agreed not to sue them for their past loan origination violations. We continued to bleed out red ink.
Then B of A contacted us. During the consolidations in the financial world, they had obtained an additional mortgage and two additional credit cards of ours. They informed us that we now exceeded their policy for debt to income and they were freezing the credit cards. They reported this to the credit companies as an adverse action. Subsequently, CC interest rates increased by at least a factor of five and we quickly found ourselves losing thousands of dollars a month.
Mortgage modifications continued to be denied or of little value. One mortgage holder forced a short sale of one of our properties to another investor for half of what we paid for it yet they would not offer us a mortgage modification. If they had reduced our mortgage balance to the sale value, reducing our monthly payment, we would have had a positive cash flow property. Unfortunately, the banks make far more money for their shareholders and officers by foreclosing or short sales than by helping out the original owners. Thank you Uncle Sam.
By late 2010 we started looking into other options including bankruptcy. The tax ramifications and financial liability associated with foreclosure and/or short sale was staggering. We talked with a lawyer in early 2011 to see what options we had. The bad news was we only had one option, Chapter 7 bankruptcy, but the not-so-bad news was that we easily qualified for non-consumer BK7 which was relatively untouched by the changes made to the bankruptcy laws in 2005. (i.e. no means test, DMI, etc).
Our initial reaction was denial followed by anger, fear and eventually acceptance. Our dream, of real estate investments supporting us in retirement and providing for our children after we pass, was gone.
By late spring of this year we started planning for entering into non-consumer BK7. This included working with our lawyer, a CPA and a retired trustee plus surfing this website. We took care of long overdue repairs to house, pool and cars, filled the pantry, got appraisals on all remaining real estate properties, home and cars, paid insurance, HOAs, mortgages, etc, increased insurance coverage where possible, quit using CCs and converted to a cash economy only.
New accounts were opened in banks where we do not have mortgages or CC. Exemptions should cover the cars and any cash left in the accounts. All real estate properties, with a few exceptions, are underwater. Those properties not under water barely have equity after you consider closing costs. Our home is below water. It is not clear whether we will be an asset or no-asset case.
Consistent with this website, our lawyer is emphatic that you do not reaffirm any mortgage or the car loan. Our lawyer has put us in contact with an “expert” in getting lien adjustments during the BK process but if we don’t get any lien adjustments (information from this website suggests we won’t) and if the property is not solid positive cash flow, it is gone. (The rents have held up in a couple of places so we have positive cash flow from them but the property values have dropped so we owe way more than the appraised value.)
Assuming none of the rental properties survive, we would be left with a first and second mortgage on our house and my income will just be able to support us. (At least both mortgages will be non-recourse.) It will be like starting all over from the beginning which is what the BK process is all about.
A big unknown is what will happen to the rent money during BK. Our intent is to exempt all rental properties and it is our understanding from court cases that trustees are only allowed to collect rents if the properties are non-exempt. However, we recognize that the trustee has significant latitude and may want the rents. Based on experiences discussed on this website, we may not get any rents as the tenants may quit paying. Our lawyer has told us, in the absence of instructions from the trustee, to proceed using the rental income as we have done in the past (pay property management, HOA dues, insurance, mortgage, etc) but not to put any of our money into any property. Conversely we are not to use any of the rent money to pay our living expenses. All rent money must go into the properties.
Another open question is our tax refund for 2011. Not sure what the trustee will want to do. Our wild card exemptions will not cover it all. Due to depreciation of our real estate properties we have always had a large refund. Depending on how and when the properties are disposed of in BK we may or may not have a large return for 2011. (BTW: we do have receipts for how we spent our 2010 tax refund.)
Right now we look at the bankruptcy process as a federal program protecting us from a failed federal housing program. When all is said and done, the BK process will change that proverbial “light at the end of the tunnel” from an on-coming train to daylight. Unfortunately, we are still in the tunnel and while we have come a long ways we still have a ways to go.
We recently filed: September, 2011
I will update this story as events unfold.
--Realized headed for bankruptcy 
December 2011
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