One of the things that most people who are about to file for bankruptcy worry about is losing their rental property. Just imagine it, a person buried under a mountain of debt losing the only property left that’s generating them some income. It can be scary. If you find yourself in this position, remember you have options. All you have to do is contact a bankruptcy attorney in Mesa and let your attorney guide you on what to do next.
However, it would help you if you walked into the attorney’s office being aware of what to expect. You will be able to ask better questions if you have some high-level level of understanding of how your rental property will be handled once you file for bankruptcy.
After filing for bankruptcy, you might or might not lose your rental property. The result of whether or not you will lose your rental property is determined by your financial position, the value of your rental property, and the type of bankruptcy you file for.
The State of Arizona has one of the most generous ‘exempt’ laws, which allow bankruptcy filers to protect a certain amount of property equity. Unfortunately, rental property is considered ‘non-exempt.’ Therefore, your creditor can seize your rental property and sell it to recover part or all of the debt you owe.
Under Chapter 7 bankruptcy, the likelihood of whether or not you will lose your rental property is greatly influenced by your property’s equity. Equity refers to the current market value of your rental house. Therefore, if the equity of your rental house is worth more than the amount you owe to your creditors, then your bankruptcy trustee will take your property, put it on sale, and distribute the sales proceedings to your creditors.
For example, let’s assume your home is worth $250,000 and your mortgage is $200,000. The equity on your home is $50,000. Your bankruptcy trustee will pay off the $200,000 in mortgage first and distribute the other $50,000 to your other creditors on a pro-rata basis.
If your rental property has little to no equity, then the trustee is highly likely to decide against selling it. And that’s because if they sold the house, only the mortgage would be covered, and the other creditors would certainly receive nothing. However, even if your property has little to no equity, you need to exercise caution with handling your mortgage payments.
Your legal obligation to pay your mortgage may have been discharged; however, remember that your mortgage financier has legal rights to your property. Therefore, they still retain their foreclosure rights. And for you to keep your property, you will need to keep on paying off the mortgage because once your bankruptcy ends, your lender can still take your property. So, if you’re considering filing for Chapter 7 bankruptcy, make sure you can keep up with your current mortgage payments.
When you file for Chapter 13 bankruptcy, your bankruptcy trustee has no right to sell your rental property. However, you can still lose your rental house. Under Chapter 13 bankruptcy, your loan repayments will be restructured and determined by the court. And the court will expect you to pay off your debt in 3 to 5 years. While the repayment period might seem shorter for some people, it is a far more generous debt repayment period than most creditors are willing to offer. The debt repayments are made every month and distributed to each of your creditors.
When determining the amount of money you’ll pay back to your creditors, the court will require you to repay an amount that is equal to the value of all of your non-exempt assets. Alternatively, the court could require you to pay the exact amount your bank trustee would have required you to pay had you filed for Chapter 7 bankruptcy.
When dealing with Chapter 13 bankruptcy, the equity of your rental property doesn’t always play a significant role. The amount of income you’re earning is more likely to determine whether or not you get to keep your rental property. Like we’ve earlier mentioned, debt repayments are made every month. And if your income isn’t enough to pay off your creditors, your bankruptcy trustee may decide to sell your rental property.
However, before your bankruptcy trustee makes this decision, they have to consider the expenses of your rental property. For example, assuming your rental property is the only source of income you have. And the expenses of your rental property such as mortgage, taxes, insurance, upkeep, and repair costs exceed your income; then it means you’re operating on a negative budget.
Therefore, your bankruptcy trustee will likely put your house on sale. And that’s because they will be assuming that the amount of money you’re losing to maintain your property is disposable income that should instead be directed to your debt repayment.
The equity of your rental property comes into play when you’re requesting the court to ‘cram down’ the mortgage of the property to an amount you can manage to pay. When the court agrees to your ‘cram down’ request, it’s allowing you to reduce your mortgage to an amount that is equal to the current value of your home. For example, if your property’s mortgage stands at $250,000 and your property’s value is $150,000, then your debt will be reduced to $150,000.
However, there is an important condition to this agreement. You will have to pay the full amount of the mortgage within the 3 to 5 years the court has set.
Once you file for Chapter 13 bankruptcy, you will still need to pay your mortgage on a timely basis. Otherwise, if your bankruptcy ends while you still have unpaid mortgage balances, your property could face foreclosure since your lender still maintains a legal right to your home.
By now, we believe you understand how your rental property will be affected when you file for bankruptcy. If you have any questions, visit our website via this link https://azbankruptcysolutions.com/mesa and request an appointment with one of our bankruptcy lawyers.
Arizona Bankruptcy and Debt Solutions
1013 S Stapley Dr
Mesa AZ 85204
Filing for bankruptcy isn’t the right solution for everyone. The determination of whether or not bankruptcy is an appropriate debt relief solution for your will be made based on a number of factors including the type and total level of your debt. Use this form to schedule an appointment with one of our bankruptcy attorneys. The consultation is completely free and there is no obligation.