Filing Bankruptcy while Owning Investment Property

With low interest rates on home loans, many people have seized the opportunity to purchase investment property. Investment property comes with a lot of risks. First the purchased property will probably need improvement. Hopefully that will only be cosmetic like counter tops, paint, and carpet. However many homes, especially those that first time investors can afford, there may be significant structural, electrical, or plumbing problems. Once you have the property in good repair you still have to deal with renters or find a buyer. If you do not have sufficient cash reserves you can easily finding yourself using credit to fill in the short falls. This is a fast track to bankruptcy.

The good news is that you can file bankruptcy and still retain your investment property. How can this be? There are actually a several options depending on the equity of your investment properties and your overall financial goals.

First, if after all of your hard work, you determine that being a real estate investor is not for you, a Chapter 7 bankruptcy is a great option. It is your lifeline. The trustee will deal with liquidating the investment property. Your attorney, i.e. ME, will deal with your creditors. The phone calls will stop and life will go on.

Second Scenario. You have investment properties that currently have no value but you are not ready to give up. In this case a Chapter 7 or a Chapter 13 can work although I usually recommend a Chapter 13. If your properties have little or no value the trustee will not bother with liquidation BUT you should keep in mind that he may try to market them. Also, if you are renting the properties out, those streams of income may prevent you from meeting the income qualifications necessary for Chapter 7. In a Chapter 13 you can keep your properties and repay a percentage of your debt. The percentage that you repay is based on your income and any non-exempt equity you may have. You will remain in control of properties and the rents that are collected. 

Finally, what is you are successful. You have several properties that have equity and regular rental income in excess of your mortgage, tax, insurance, and management costs? You can still file a Chapter 13 bankruptcy. In this scenario you can retain your properties and rental income but you will likely repay 100% of your unsecured debts. Keep in mind that interest and penalties are frozen the day you file so you will be saving thousands of dollars while still repaying what you actually borrowed. There are some restrictions to filing Chapter 13 related the amount of secured debt you have. You can have no more than $1,010,650 of secured debt.

If you are an investor and you are considering filing for bankruptcy please give me a call. You can reach my office at 817-494-3344.