Filing for bankruptcy is a scary option for many. If you own a rental property, it can be particularly daunting. You do want to lose this source of income, but you know you need help with your debt.
You are likely wondering if there is any way to keep your rental property, if you move ahead with a bankruptcy filing. Here is what you need to know about filing for bankruptcy when you own an investment property.
Filing for Chapter 7 bankruptcy
When you file for Chapter 7 bankruptcy, your assets are liquidated to pay off your debts. However, your rental property may not automatically be sold off. If you owe more than the property is worth, the bankruptcy trustee probably will not sell your property. You must continue to make your mortgage payments, however. If you do not, the lender can foreclose on your property, after you complete your bankruptcy filing.
You may also have some equity in your rental property, which puts it at more of a risk of being sold to settle your debts. However, California allows you to protect a limited amount of your assets through bankruptcy exemptions. To keep the rental property, you could use California’s wildcard exemption. If you pool all your exemption money together, you would have $28,225 to protect your real estate. Assuming you do not have more than $28,225 in equity, you can keep the trustee from selling your rental property through this wildcard exemption.
Filing for Chapter 13 bankruptcy
Chapter 13 bankruptcy allows you to keep most of your assets. You essentially go through a debt restructuring and agree to pay back your creditors over three to five years. This should allow you to keep your rental property.
However, if you are losing money on your rental property, you may not be allowed to keep it. The bankruptcy court wants to ensure you have money to pay your creditors, so keeping an investment that is draining your resources will not help you turn things around. You could explore restructuring the finances on your rental property to help it start generating cash again. You may want to consider reaching out an experienced debt relief attorney to discuss your options.
Filing for bankruptcy can get out from under a large amount of debt. Even if you own a rental property, there may be ways for you to hold onto your property when filing for bankruptcy.