If you have become unable to pay down debt, and have fallen behind with payments, you may be considering filing for bankruptcy protection. One of the biggest concerns when deciding to file bankruptcy is what happens to your property? It all depends on the type of bankruptcy you attempt to file. Chapter 13 bankruptcy affords debtors some unique opportunities with regards to keeping property "property exemption" while minimizing debts and monthly payments.
How Investment Property is Treated Under Chapter 13
Under the guidelines of chapter 13 bankruptcy laws, investment property such as rental houses or apartment buildings is considered separate from your homestead, or primary residence. As such you are afforded a unique opportunity to "cram down" these debts to fair market value. A cram down is essentially a readjustment of your principle to reflect the current value of your rental property. Your bankruptcy lawyer will need to negotiate the details with the creditors and bankruptcy trustee, but often times, if the correct approach is taken and your attorney possesses the requisite negotiation and legal skills, the principal balance can be modified to reflect actual market value.
How a "Cram Down" of Rental Property Debt Works
Essentially, your attorney will attempt to persuade the bankruptcy court trustee to force your creditors to remove some of the debt owed to them in order to bring the principle balance on the loan down to an acceptable market value. For example, suppose you purchased a rental property in 2007 for $100,000 with no money down. Since then, the fair market value has dropped to $60,000. This means your equity in the property is negative $40,000. If your attorney can force the cram down, your creditors will be legally required to accept $60,000 for the property, and adjust your loan appropriately.
Reduce Payments and Keep Your Rental Property
The end result of a chapter 13 bankruptcy cram down is that you will keep your property while reducing your monthly payment significantly. The only caveat is that, once your repayment plan has been worked out and agreed upon, you cannot miss any payments, otherwise the protection afforded by the bankruptcy court will be eliminated. If there are any issues down the road with making your payments, always notify your attorney and trustee to let them know that you may need an adjustment of your repayment plan.
For more information on bankruptcy, and which bankruptcy option is best for your situation, talk to a bankruptcy lawyer. They will be able to assess your financial situation and inform you of all your legal rights and options.