What Happens if You File Bankruptcy on a Rental Property?
Filing for bankruptcy is a complicated process -- and it becomes even more complicated if there is more than personal property involved. Rental property presents an especially tricky situation, since it is considered both an asset and a source of income. How rental property is treated during bankruptcy will depend on the type of bankruptcy case you file, and whether you wish to keep the rental property.
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Chapter 7 and Chapter 13
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One of two types of bankruptcy cases is filed: Chapter 7 or Chapter 13. Chapter 7 is a liquidation bankruptcy case. The petitioner allows for most of his assets to be liquidated in order to pay his creditors. In a Chapter 13 case, the petitioner creates a repayment plan. If the plan is approved, the petitioner has three to five years to pay his creditors. In exchange, the petitioner gets to keep most, if not all of his assets.
Reaffirmation
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If you file a Chapter 7 case, but want to keep your rental property, you can reaffirm the mortgage with your mortgage owner. Reaffirmation means you acknowledge the debt, wish to keep in separate from your bankruptcy filing, and are willing to continue to pay for the property even though you have filed for bankruptcy protection. In return, the creditor agrees to continue to honor the mortgage agreement, and not to repossess or foreclose on the property as long as you, as petitioner, stay current on your mortgage payments.
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Redemption
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If you have filed either a Chapter 7 or 13 case and your rental property is already in the foreclosure process, you can buy the property back from the mortgage company, or from the new owner if the rental property has been resold through redemption. This requires that you pay a lump sum for the property, either the outstanding amount on the mortgage plus any fees if the property has not been resold, or the amount the new owner paid for the rental property if it was resold.
Surrender
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If you file for bankruptcy and decide you do not want to keep your rental property, you can surrender the rental property back to the mortgage lender. If the lender agrees to take the property back, negotiating a cancellation of debt agreement is vital. This means that if the lender takes back the property and resells it for less than was owed, the lender cannot hold you financially responsible for the balance.
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References
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