Good news or bad news, the bankruptcy trustee doesn’t want your underwater property.
Trustees only want the good stuff, the assets that generate cash to pay creditors.
That doesn’t include real estate where the debt is on par with the property’s fair market value.
Will we have to sell?
My clients this week own a number of rental properties where the loans match the properties’ value.
The clients thought the properties had long-term appreciation potential and were just certain that filing Chapter 7 meant giving up the properties.
The trustee’s focus is the here and now.
Chapter 7 truste’s job
The bankruptcy trustee is charged with turning non exempt property of the bankruptcy debtor into cash for the benefit of the creditors.
The trustee’s focus is on the bottom line. For each asset, the trustee asks:
- What is the asset worth, today, in its present condition?
- What are the costs of preserving the property pending sale?
- What are the costs of selling the asset?
- Are there tax consequences of the sale?
The trustee’s handbook is clear that the trustee should administer assets only if he expects to be able to make a meaningful distribution to creditors. Each trustee has a threshold that he sees as the minimum amount of money necessary to open a case.
So, for these clients, they are likely to emerge from Chapter 7 with title to these properties still in their portfolio. When you crunch the numbers, for each property, the costs of selling the properties, maintaining them in the interim, dealing with tax returns and possible tax consequences would consume all the sale proceeds.
The real threat to real estate
A basic premise of bankruptcy law is that liens pass through bankruptcy unaltered.
Post bankruptcy my clients will still have rentals encumbered to the extent of their value. They will still be subject to foreclosure if they fail to make the mortgage payment to the bank.
But they don’t have to worry that the trustee will deprive them of the property simply because they filed bankruptcy.