For rental property owners across the United States, recent years have been challenging at best. During the pandemic there were long eviction freezes and rent moratoriums. While those days are behind us, many landlords have yet to recover financially.
More than 70% of properties with four or fewer rental units aren’t owned by large real estate companies, according to the National Association of Realtors, but rather mom-and-pop landlords who often live nearby, manage the property themselves and rely on the rental income to pay their own mortgages. Now, property renters are facing difficult financial situations and are considering bankruptcy.
If you’re one of the many renters that might opt for bankruptcy, it’s important to know how it may affect you and your property.
What is Considered Rental Property Under Bankruptcy?
Just because you don’t own a multi-family apartment building doesn’t mean that you don’t have rental property. In bankruptcy, any property that you rent out is included – such as commercial spaces, multi-unit buildings, and even storage units. The outcome of your rental properties depends on the type of bankruptcy that you pursue.
How Chapter 7 Bankruptcy Treats Rental Property
In a Chapter 7 bankruptcy, the main focus is to entirely eliminate your debt load so that you can have a fresh start. Because of this goal, during this process personal possessions are sold to provide money to satisfy creditors to leave you with no debt. Generally speaking, personal homes are included as “exempt” from seizure if someone pursues a Chapter 7 bankruptcy, making it possible for families to get off to a good start without being homeless. Unfortunately, this exemption is not available for any properties other than your personal home. While some Chapter 7 bankruptcies offer “wildcard” exemptions, the amount may make it difficult to use it to maintain rental properties.
A Chapter 13 Bankruptcy Helps Renters
A Chapter 13 bankruptcy is a more suitable option for those with rental properties. During a Chapter 13 bankruptcy, your debt doesn’t actually go away – instead, it is simply refinanced into more manageable payments over a 3 to a 5-year term. The end goal is to be out of debt within the term while keeping your property. If you still owe money on the rental properties, you will be expected to pay it back. But a lawyer can guide you through a process – such as “cramming down” the value – so that you don’t have to pay more than the property is worth, even if you owe more on it.
If you own rental properties and are still waiting for federal or local program aid, you may be waiting longer than you can afford your mortgages. A chapter 13 bankruptcy can help renters and landlords get rid of debt, keep their properties, and achieve a better and more secure financial future.
The Best Option for Rental Property Owners
Bankruptcy may seem scary, but the right bankruptcy attorney will help make your process smooth and help you achieve financial security even in these uncertain times. Chapter 7 bankruptcy may be right for some property owners seeking to get rid of debt entirely. While a Chapter 13 bankruptcy may be better for renters seeking to keep as many of their assets as they can. With the right attorney, you can understand what will be expected of you in a Chapter 13 filing and learn the best ways to limit your debt load and cover your payments.
To a property owner that depends on their rental homes to provide income, the bankruptcy process can seem daunting at first. Thankfully, when a Chapter 13 bankruptcy is done right, it can be exactly what renters need to recover their finances and start bringing in money rather than simply treading water.
If you are a rental property owner looking to escape financial ruin, feel free to contact me. Brighter days are ahead – make sure that you’re ready for them by being debt-free!
