Filing Chapter 13 Bankruptcy on Investment Property If Their Rent is Your Only Income

You should file Chapter 13 on investment property if you have investments whose value has declined while the mortgages or other loans on them have not. 

How Chapter 13 Works

Chapter 13 is a type of bankruptcy that is known as “Individual Debt Adjustment.”  A debtor’s assets are not liquidated as in Chapter 7; instead, the court organizes a payment plan so that the debtor can repay the creditor or creditors.  This plan normally is over a 3- to 5-year period. 

All disposable income (this is income minus basic living expenses and other protected obligations, such as child support payments) is applied to this payment plan.  After the plan’s duration, any remaining debts are discharged or erased.

Chapter 13 involves “cramming down” the value of investment properties, or adjusting the value of those properties to match today’s market value.  This, in turn, will reduce the amount of debt owed on those properties, since the amount of the mortgages and/or other loans on them will reflect this new value, not the original value of the property.  As a result, the creditor will still have a claim on the property and can still expect payment on the property, but will not receive the full value of the outstanding loan balance, thereby making it easier for the debtor to pay his/her debts.

Why Filing Chapter 13 on Investment Policy May Be Accepted in Your Case

When one files Chapter 13 on investment properties, the chances of it being accepted depend greatly on whether the income from those investment properties is one’s main or only source of income or not. 

In the case where a person is making his/her primary income from the maintenance or renovation of rental real estate, the bankruptcy trustee is more likely to accept Chapter 13 because those investment properties are the key to maintaining the debtor and his/her family, and thereby, the debtor’s repayment to the creditors. 

Therefore, the cram down of the investment properties is needed to ensure that the debtor can pay off as much of the debt as possible during the 3- to 5-year period.  As a result, the Chapter 13 case on investment properties that are the main source of a debtor’s income is likely to be granted.

Attaining Legal Help

Filing a successful Chapter 13 case on investment properties can be a complex matter.  An experienced bankruptcy attorney can provide all of your legal options and decide which option will work best in your case so that your Chapter 13 case is granted and you can keep your investment properties while fulfilling your debt obligations to your creditors.