Will I Lose My Second Home in Chapter 13 Bankruptcy? It Depends.
A Rental Property or Second Home in Chapter 13 Bankruptcy: A Drag on the Bankruptcy Estate?
A rental property or second hom in Chapter 13 bankruptcy can be a difficult thing to hang onto through the bankruptcy process depending upon whether the property is or isn’t a “drag on the bankruptcy estate.” That is, depending upon whether it is earning you money or losing you money on a monthly average basis.
Among the many advantages of a Chapter 13 bankruptcy is that Chapter 13 bankruptcies do not require the liquidation of property as Chapter 7 bankruptcy does when a filing debtor owns property of too much value to be exempted, or protected, through the Chapter 7 process. Chapter 13 bankruptcies are instead “funded” by the monthly payments that filing debtors make to a Federal Bankruptcy Court-enforced Chapter 13 payment plan. Through the payment plan process of a Chapter 13, debtors do repay some of what they owe to their creditors (the balance unpaid at the end being generally discharged as in a Chapter 7 bankruptcy). Therefore, there is no need for liquidation of assets, which is the mechanism that allows creditors to be paid something toward the discharged debts in a Chapter 7 bankruptcy. No assets are liquidated at all in a Chapter 13 bankruptcy.
Thus, you will not have a rental property or second home in Chapter 13 bankruptcy forcibly taken from you and sold off.
That does not mean, however, that it is always possible to retain a second home or second piece of real estate in a Chapter 13, particularly if it is a home for which you are making mortgage or other payments.
Rental Property or a Second Home in Chapter 13 Bankruptcy: The Chapter 13 Trustee & Confirmation of the Chapter 13 Plan
When a Chapter 13 bankruptcy is filed, a Chapter 13 payment plan is drafted by your Michigan bankruptcy attorney and filed with the Bankruptcy Court along with your bankruptcy petition. The Chapter 13 payment plan, following the rules for plan-drafting and creditor repayment codified in the US Bankruptcy Code and the Local Rules of your Michigan bankruptcy court, describes which properties are to be retained or surrendered, which contracts are to be “assumed” or rejected, which creditors are to be paid what amount of money over a period of time from 3-5 years.
The underlying law says, in essence, that you must pay all of your available household income into the Chapter 13 plan for that 3-5-year period. of time.
Real estate may be surrendered in a Chapter 13 bankruptcy the same way it may in a Chapter 7 bankruptcy. Bankruptcy, either Chapter 7 or Chapter 13, is generally the quickest, most predictible, and most cost-effective means of “walking away” from an underwater property or foreclosed home with the fewest potential taxable liabilities involved, almost always a better step to take than a short sale or other step requiring creditor approval, settlement negotiation, uncertain timeframe, and potentially significant taxable liability.
If you want to retain real estate other than the home you actually live in that has a mortgage, HELOC, or other secured debt (and other maintenance, tax, and insurance expenses) associated with it, however, it cannot eat up as a monthly expense money that might otherwise be paid into the Chapter 13 payment plan for the benefit of your creditors.
That is, as stated above, a second home in Chapter 13 bankruptcy cannot cost you money. It must be earning you money.
For example, if you own a rental home which costs $1000/month in mortgage payments, requires $50/month in maintenance and an average of $100/month in property taxes & insurance, this home is costing the “bankruptcy estate” $1,150/month. If you are renting that house out for less than $1,150/month, it is a financial “drag” on the bankruptcy estate, and the Chapter 13 Trustee will object to your Chapter 13 Plan, preventing its confirmation (approval) by the Bankruptcy Court unless the home is surrendered in the Chapter 13 Plan rather than retained.
Neither the Chapter 13 Trustee nor anyone else can force you to surrender the property or seize it from you, but your Plan may not be accepted if it is, because of a rental property or second home in Chapter 13 bankruptcy, devoting less money to the plan than you would have done if you had surrendered it and ceased making payments on the mortgages and other attendant expenses.
Rental Property or a Second Home in Chapter 13 Bankruptcy: One Exception
There is, however, one important exception to the general rule that you cannot retain a rental property or second home in Chapter 13 bankruptcy if it is not earning you money: the “100%” Chapter 13 Plan.
Chapter 13 plans are treated differently, typically, by Chapter 13 Trustees if they are, regardless of your expenses, already paying 100% of what you owe to your creditors. What you pay into a Chapter 13 Plan every month depends upon your household income relative to your household expenses. If you have higher income and lower expenses (or not that much debt to begin with), you might have a Chapter 13 Plan which proposes to pay (at 0% interest and without the taxable liability that can arise from settling a debt outside of bankruptcy) 100% of what you owe. Most Chapter 13 Plans pay much less than 100% to creditors, but it is possible that 100% is the case.
If this is so, the Chapter 13 Trustees do not have much remaining to object to (although, in Detroit, they will always find something) as most Trustee objections are related to the argument that you are not paying all that you could be paying into your Chapter 13 Plan. You cannot pay more than 100% of what you owe, simply. If you are already doing that, the Chapter 13 Trustee in your case may not (no guarantees) object to the retention of a second home in Chapter 13 bankruptcy that is not “earning” you money.
A Second Home in Chapter 13 Bankruptcy: The “Come to Jesus” Moment
If a property is deeply underwater and costing too much on a monthly basis currently in this housing market, it is unlikely to produce great benefit anytime in the near future. It may be worth rethinking hanging onto such property, and it may be worth surrendering it in a true personal reorganization for the sake of one’s overall financial health. The Chapter 13 bankruptcy is a “reorganization” bankruptcy, allowing you the rare opportunity to pay what debt you can actually afford to pay, protecting you from creditor harassment for 3-5 years in the process, and allowing you to repay that amount, whether it’s 100% or 0.5% of what you owe, at 0% interest with 0 taxable liability.
It can be an unreasonable expectation that you be allowed to retain everything that you want to retain if that property is not actually necessary for the well-being of your family or the earning of your income. Discussing with clients whether an expectation that a second home in Chapter 13 bankruptcy might be retained is an unreasonable expectation or not is not the favorite task of any bankruptcy lawyer—but it is often a necessary one.
When you contact a bankruptcy attorney to discuss your roadmap for cost-effective, time-effective freedom from debt, be prepared to look hard at your own expectations and to consider that bankruptcy as a Constitutional legal process is a gift from the US government, one which does not contemplate that you necessarily be allowed to have your cake and eat it, too.
It is not an easy thing to do, but it is often extremely beneficial to consider the future benefits for you and your family.
If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.