Many debtors filing Chapter 7 bankruptcy in recent years own more than one piece of real property. When home prices were skyrocketing in the early 2000’s, many people bought real estate as an investment to use as a rental while the property appreciated in value.
As most people know, that strategy stopped working in late 2006 when home prices began to decline due to changes in the economy. For some, the rental property (and the mortgage associated with the property) became a financial problem. Some owners lost their renters, some lost their own jobs, and some lost business-related income due to the downturn.
Eventually, there were a large number of second and third homes that were at risk of foreclosure because the mortgage was no longer current. When a Chapter 7 bankruptcy case is filed, a debtor has a few options. One option is to let the property be foreclosed and discharge the loans associated with the property. If the property was foreclosed upon prior to the bankruptcy filing, the remaining debt on the loans can still be discharged.
Some debtors, however, have a renter in their second property and they are receiving enough in rent to keep the mortgage current. If that is the case, the debtor can keep the rental property through bankruptcy as long as there is not too much equity. If there is a large amount of equity beyond the amount that the debtor can protect in a California bankruptcy case, the Chapter 7 Trustee can liquidate the property to get money to pay the unsecured creditors. However, due to the timing of the decline in home prices and when most of the homes were purchased, it is not common for debtors to have equity in a rental property (they must have owned it for a long time or made a large down payment at the time of purchase).
If a debtor chooses to keep a rental property through the bankruptcy, the loan will still be discharged, but the lender will retain their secured interest. That means that the debtor will need to continue to keep the loan current to avoid foreclosure.
It is always a good idea to speak with an attorney before filing a bankruptcy, especially when you own real property that can be affected by the process.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.