Should we allow foreclosure to happen on Rental Property

[LostNFound]

I'm frustrated. My husband and I own 5 rental properties (all single family dwellings and one duplex). It's pointless to mention that the economy has been failing miserably, but needless to say, we have tenants that aren't paying the rent. We have struggled for over a year to make late payments on those mortgages. However, currently, we have a tenant that is 3 months behind, another that is 5 months behind, and we just received notice that our best tenant will be moving out.

WE have no more savings, we have not paid on a credit card since Feb 2009 (to pay on the properties). I am a nervous wreck because I feel that we need to be setting something aside for our own savings in the event that something happens to us.

My husband doesn't want to file bankruptcy. For some reason, he feels that is the last resort--that somehow, foreclosure would be better? I don't know. We make a good living, but not on paper. I am a self employed daycare provider and part time photographer. I've invested a few thousand into my business in the last 8 months, so I worry about filing bankruptcy for fear that they would take my equipment--which has afforded us the ability to continue to pay our bills.

So...for those of you with rental properties...is it really as simple as walking away from the property and the bank takes it back? We have enough equity in them, that they should be able to sell for about what we owe. Although, we've had them listed on the market for over a year and not sold them. So maybe it's wishful thinking.

Do we walk away? Let them foreclose and be done with the worry ?

[Tom_Mi]

Oh, boy. Have I been there. I went thru this 2yrs ago. First I'll tell you what I did, and then I'll tell you what I'd do DIFFERENTLY today.

What I did:
Freddie Mac hadn't imploded yet, so they were hammering me with threats of deficiency judgments of 300k+. If I walked, and turned those homes into non-consumer deficiency judgments, I wouldn't have qualified for CH7, so I filed CH7 pre-emptively. I did this because I was one of the first to have this issue in the declining market, and nobody could confidently help me get the bank to back off.

What I'd do now:
After I filed...local attorneys I knew started talking about how they negotiated returning deeds to their banks without threat of deficiency. You CAN avoid deficiencies, if you find the right atty to help you negotiate it.

So:
-If you haven't put 20k+ on credit cards because all your cash was paying mortgages
-If dumping the rentals eliminates most of your debt problems

Then start looking for a local atty comfortable with 'real estate' issues. Tell them you want to basically negotiate a Deed-in-Lieu...with guarantees of no deficiency.


Good Luck!



Update: The above atty might quote you a fee that isn't small. Certainly scrutinize his fee, but also remember that an asset-case Bankruptcy will cost you 2000+ in legal fees, plus maybe a few thousand more to the Trustee to keep things you can't exempt.

[LostNFound]

Thank you for your quick response. We actually have 120K on credit cards. Yea, I know, not good. My husbands theory was that we would sell the properties and then negotiate (try) with the credit cards. They have backed off us for about 2 months now. However, the properties aren't selling so that doesn't help our situation.

I have contacted a bankruptcy attorney, but they wanted complete account of our expenses/income for the prior 6 months. I don't have that information available because I am self employed...it's a lot of work. I'm getting to it. But I was so busy trying to make a living, I've not had the time to work on my taxes. I work 12 hrs a day with daycare and then work some evenings and most weekends with photography...plus I have 4 children (3 teenagers). My life is so hectic right now.

I would love to put all of it behind us. But I'm fearful that bankruptcy wouldn't work for us because it feels like we make enough money (without the rentals). I guess we will have to look into it again, possibly. We just haven't taken the time (yet) to sit down and pencil in the numbers.

[Tom_Mi]

Sorry, didn't know about the 120k. I guess it comes down to how low you can negotiate that. I suppose if you 'really' want to avoid BK, you might try to have that Real-Estate atty negotiate the CC debt...and try to find out ahead of time what discounts he can get.


My 'bankruptcy attorney' knew real estate, but didn't offer much help in non-BK solutions -- probably because his firm was optimized to focus on the BK process.

[frogger]

We actually have 120K on credit cards. Yea, I know, not good. My husbands theory was that we would sell the properties and then negotiate (try) with the credit cards.

Let me give you my theory, which is in direct opposition to that of your husband.......

File for bk, do not reaffirm the properties, pay 0% of the credit cards, and begin living life again. While you have the properties, you probably can avoid having to take the means test, and you may have enough income or debt that you don't even qualify for a chapter 13 and can go straight to a chapter 7.

Or.... walk away from the properties, let the chips fall where they may, and then spend who knows how much time beating your head against the wall trying to pay off the credit cards.

No one wants to help you or negotiate with you until you're not in a position to negotiate anyway. Your credit will be shot and you'll be broke.

Start fresh, start new, start without the burdens that your husband is trying to shoulder.

[frogger]

Update: The above atty might quote you a fee that isn't small. Certainly scrutinize his fee, but also remember that an asset-case Bankruptcy will cost you 2000+ in legal fees, plus maybe a few thousand more to the Trustee to keep things you can't exempt.

Small change once you stop the bleeding. When your properties are not paying for themselves and your paying the bills with your living money, you are bleeding out fast. It is going to snowball and you'll be in so deep ever so quick.

A couple of thousand + in legal fees plus buying back some of your assets is cheap when I look at it. Continue to lose thousands of dollars a month with no hope in sight or take the one time hit of bk lawyer charges + buying back some of your assets? I know which one I'm choosing.

[LostNFound]

Frogger....I couldn't agree with you more. I can't help but feel that Bankruptcy would be the best solution. At least I would know I'm DONE and where I stand with my future. My husband is apprehensive for many reasons. One, he thinks that bankruptcy would be a negative on our credit for over 10 years and it's something that we would have to admit forever....whatever. Credit got us into this mess so I can honestly not care any less about my credit at this point.

Secondly, my husband has "toys" that he doesn't want to lose. Specifically, 3 snowmobiles and a motorcycle. One of the snowmobiles is my son's, but it's in our name (we will lose it) and we have a car that is in our name that is our sons. It is also paid for. So, he complains occassionally about losing those things. Ive heard you can buy back some things and I'm willing to try that. We also have a tax return that will probably get taken from us and I was hoping to use that to buy a car for myself. I have a leased auto that needs to go back in Sept. It's just one stupid thing after another.

I don't know what direction to turn. I'm so frustrated that it's been easier to do nothing then to think about it. But with the new year...I've just decided that we have to make a decision. I'm not sure what that is yet....it's so hard to know. I wish I could visit with an attorney to know my options a little better.

[frogger]

Frogger....I couldn't agree with you more. I can't help but feel that Bankruptcy would be the best solution. At least I would know I'm DONE and where I stand with my future.

Exactly. A way to start over and rebuild.

My husband is apprehensive for many reasons. One, he thinks that bankruptcy would be a negative on our credit for over 10 years and it's something that we would have to admit forever....whatever.

Hubby needs to honestly evaluate things. His/your credit is already shot!

Credit got us into this mess so I can honestly not care any less about my credit at this point.

Same here.

Secondly, my husband has "toys" that he doesn't want to lose. Specifically, 3 snowmobiles and a motorcycle. One of the snowmobiles is my son's, but it's in our name (we will lose it) and we have a car that is in our name that is our sons. It is also paid for. So, he complains occassionally about losing those things.

Tell him not to worry. If he keeps going the same course, he's going to lose them anyway.

Ive heard you can buy back some things and I'm willing to try that.

Probably so. For a very good price too.......

We also have a tax return that will probably get taken from us and I was hoping to use that to buy a car for myself. I have a leased auto that needs to go back in Sept. It's just one stupid thing after another.

You don't have a monopoly on stupid. I know that I had plenty of that myself.

I don't know what direction to turn. I'm so frustrated that it's been easier to do nothing then to think about it.

And while your and his head is in the sand, you're bleeding out. Been there and done that too.

But with the new year...I've just decided that we have to make a decision. I'm not sure what that is yet....it's so hard to know. I wish I could visit with an attorney to know my options a little better.

The hardest part is making that decision. Once you decide what to do, it gets easy from there. I never knew that being so broke could feel so good.

I'm getting out of the shackles of debt that have had me chained for years. I wouldn't mind a toy or two, but they're not my life. Having my bills paid and soon to have no debt is the most liberating experience that I've ever had.

[LostNFound]

Thinking about it, I'm fairly certain that we could save an additional $1000-2000 per month if we didn't have the houses and credit card debt. It is all relative to how much I work, naturally. But that is why we have waited to talk about Bankruptcy. What judge in their right mind would let us walk away from all this debt...knowing we could save so much after the fact? Then again....after expenses...we are considered poverty level...I think the whole system is corrupt! ha

[BCA2009]

From what I've read on this forum, if you can file a non-consumer Chap 7, you can skip the means test. That is the hard part for alot of peolpe. I would certainly look into this before I lose the rentals properties to foreclosure. Once you lose them, your non-consumer debt will go way down.

good Luck!

[Tom_Mi]

I did what frogger suggested...and only regret it a little because I didn't have much cc debt. 120k is a different animal.

[HakunaMatata]

While a BK will be reflected on your credit report, your credit score isn't going to be ruined for ten whole years. It's easy to forget we all started without credit and built great scores. Credit can be rebuilt.

http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/BounceBackFastAfterBankruptcy.aspx

What judge in their right mind would let us walk away from all this debt...knowing we could save so much after the fact?

As someone here cleverly mentions, a BK filing is a snapshot of your six month look back, not a motion picture. If your financial circumstances don't change, your debt load will increase (compounding interest, tenant loss, increased taxes). There isn't a BK law indicating a "fresh start" incorporates former financial failure. This is the beauty of BK...we have the opportunity to move financially forward.

[LostNFound]

Thanks for all the replies! Wow. So much good advice and help offered here. I think the struggle is not knowing which foot to put forward (first). I know that talking to an attorney is necessary. However, we haven't had time to get our finances on paper for prior 6mths. I am working on that.

Until that time, it's been a guessing game. I wonder if letting a couple of properties go into foreclosure will help ? Then again, the 120K isn't going to go away forever. I know that the calls have stopped for a while, but it's just a matter of time before they begin again. I have no idea WHY they have stopped coming after us? Weird.

I'm also worried about my house. We have 3 mortgages against it and we are paying on all of them without a problem. But I'm not certain what (if any) of our rentals used our house for collateral. If that's the case, I suppose we risk losing our house--even though we've continued to pay on it?

[ToughTimes]

LostNFound,

I'd sure encourage DH to just have some free consults with attorneys and/or to spend some time reading in this forum.

After you've read a lot about credit scoring and how various actions affect your credit score, you'll see that multiple foreclosures and settlements are really likely to have a worse effect on your scores than would a single bankruptcy.

What I've seen posted again and again is people having decent scores about two years after a bankruptcy. I've seen it posted repeatedly that one cannot get a mortgage loan until three years after a foreclosure. Settlements also get you derogatory entries.

In addition, any debt cancelled due to settlements will cause you to get 1099-Cs that are likely to be taxable unless you can prove insolvency at the time. The same will be true of any debt cancelled on your non-residential real estate outside of a bankruptcy.

My husband resisted bankruptcy, too, until he could see that it was going to be the only sensible business decision to make.