Can you keep your investment properties if you file chapter 13?

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Question:

Can you keep your investment properties if you file chapter 13?

Answer:

When you file for Chapter 13 bankruptcy, you are basically restructuring your debt through payment and interest rate modifications. Unlike a Chapter 7 filing, you are not required to liquidate your assets. Investment properties such as rental units and apartment buildings are considered separate from your homestead (primary residence) under Chapter 13. This categorization allows you to "cram down" your debts on investment properties to their current market value (CMV). A cram down is simply a re-adjustment of your principle to reflect the current value of your rental property.

If you wish to utilize the cram down component of Chapter 13, your attorney must persuade the bankruptcy court trustee to force your creditors to disallow some of the debt you owe them to bring down the principle balance of your loan to the current market value. Such persuasion is vastly dependent upon your attorney's negotiation and legal skills.

To illustrate how a cram down works, consider for example that you purchased rental property in 2005 for $200,000 with no money down. However, the ensuing years has brought the fair market value down considerably, until your rental property value is now worth around $50,000. The negative equity amounts to $150,000. With a cram down, your creditors will be legally required to accept the current $50,000 CMV instead of the 2005 CMV of $200,000 and your loan will be adjusted appropriately.

A Chapter 13 cram down allows you to retain your investment property while reducing your monthly payments on that property. However, under Chapter 13, you must not miss any payments otherwise the bankruptcy protection will be lifted, leaving you once again at the mercy of your creditors.

Discuss your bankruptcy goals with an experienced bankruptcy attorney to prevent any snags in the process.

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