When experiencing financial difficulties, declaring bankruptcy is the best way to handle the situation. Typically, bankruptcy is a process that gives you, a consumer, and an entity a fresh fiscal start by helping you pay creditors and eliminate debt. Nonetheless, before you obtain this financial discharge, you must make sacrifices, including exposing your investment properties to court scrutiny. Sometimes, you must sell these properties or release them to court-appointed trustees to trade the property in return for debt settlement.

The fate of your investment property depends on whether you declare bankruptcy under Chapter 7 or Chapter 13. If the court considers your investment positive, you will keep it. Nevertheless, when it is unprofitable, it will be deemed a negative and put up for sale.

Declaring Bankruptcy

When looking for a clean slate financially after being overwhelmed by debt, bankruptcy is the way to go. It allows you to organize finances and release you from liability for certain debts. Also, during this period, debt collectors and creditors are prohibited from reaching out or engaging in any debt collection activity. Once you have opted for debt release, you must adhere to various court processes that involve filing documents and stating the reasons for bankruptcy declaration.

The bankruptcy process is complex and hard to navigate without the assistance of a bankruptcy attorney. Specifically, it would help if you had legal counsel experienced in handling investment properties. These advocates know the paperwork you must file and the obstacles involved in the process, streamlining the debt discharge procedure. The filing fee eliminates individuals who want to take advantage of the process. The amount to be paid depends on the kind of bankruptcy you want to declare.

Although bankruptcy declaration is an excellent way to obtain debt relief, it opens your investments to court scrutiny. The fiscal scrutiny ensures your bankruptcy claim is genuine and that you are not avoiding debt repayment. Besides, when opting to declare bankruptcy, you must understand that it will significantly dent your credit score, hampering your capacity to make financial decisions later in life. With a poor credit rating, obtaining a loan to venture into a business will be challenging. Because of this, it is crucial to weigh your options on whether bankruptcy declaration is the best way out of financial hardship. If it is not, you should objectively evaluate other options. 

Bankruptcy Types

Several options are available if you are a genuine and diligent person looking to discharge your debt through bankruptcy. The bankruptcy type you opt for depends on whether you want to liquidate or reorganize your debt. Further, your choice depends on your monthly earnings and whether your financial hardships extend to your investment properties. So, when your business is experiencing financial difficulties, you can file bankruptcy to avoid dealing with debt collectors directly.

The most prevalent bankruptcy forms for businesses are Chapters 7 and 13. Chapter 7 focuses on liquidation, where you deal with a court-appointed trustee who is likely to dispose of your investment to repay debt. On the other hand, Chapter 13 focuses more on reorganizing your finances to pay the debt without losing your investment properties.

Chapter 7 or Liquidation Bankruptcy

Also known as the liquidation or straight bankruptcy, Chapter 7 lets you transfer your assets to a third party who sells and uses the proceeds of the sale to pay your debt. The liquidation option is available if you are a consumer or business entity. Besides, before filing this form of bankruptcy, you must meet two requirements. First, you should pass the means test that requires you to provide the court with necessary information proving that your monthly earnings are only enough to pay for your expenditure. You will give the court access to your daily expenditure and compulsory subscriptions.

Secondly, under liquidation, you cannot file for another straight bankruptcy within eight years after your last application. Therefore, it is a requirement that you can only declare bankruptcy under Chapter 7 if you do not have recurring financial hardships. If you make a second application for liquidation within eight years, the court is less likely to approve it. If the first liquidation fails, there is a high probability that a second one will fail, hence the need to explore other means of options. When you fall short of the eligibility criteria for liquidation, the court converts your request to Chapter 13 bankruptcy. However, there is an exception if you are an incapacitated ex-military who incurred debt while on duty or your debt has accrued due to running a business. 

If you are eligible for liquidation and the court approves your application, the court will assign you a trustee. The role of the third party is to liquidate your non-exempt assets to pay off your unsecured debts. Again, when the court approves your application, you are placed under ‘automatic stay', where your creditor or debt collectors cannot make any efforts to recover their money unless a trustee gives the go-ahead. During the stay, the trustee will sell all your non-exempt assets and settle your debts.

One rule of liquidation bankruptcy is separating your assets into categories to prioritize payment. The most urgent debts, like unsecured debts, are paid first. These debts include:

  • Child support
  • Debts arising from taxes
  • Court-imposed fees and fines
  • Alimony
  • Debts accrued from condominium fees
  • Pension plan debts
  • Any compensation paid to an accident victim for personal injuries of wrongful death
  • Government fines and restitutions
  • Student loans, unless repayment, will push you and your immediate family into deeper financial problems.

Chapter 7 bankruptcy is about consolidating all your investments and converting them into cash to pay a debt before the remaining amount is discharged. Not all property can be converted into cash to foot your debt. These assets that cannot be disposed of are exempt and include your home, personal property, or vehicles.

In California, you must choose the state over federal exemptions to protect your property when applying for exemptions. At this point, you must bring in a bankruptcy attorney to explain the differences between federal and state exemptions. Under state exemptions, you have two options to pick from, subject to whether you have substantial home equity or other viable property apart from your home equity. Additionally, you can rely on federal exemptions applicable under your circumstances. Some assets you can exempt from straight bankruptcy are your bank accounts, hefty musical instruments, including pianos, and rare collections.

Effects of Liquidation Bankruptcy on Investment Property

Under straight bankruptcy, you inform the court that you cannot continue servicing your debt because your revenue can only pay for your daily expenses. After the approval of your application, the third party assigned your case will come to your property and identify all viable assets and seize all non-exempt properties. Afterward, they will sell the investments and use the cash proceeds to pay unsecured debts.

Consequently, if you have any investment property like a rental property or a business premise, primarily if they have substantial equity, liquidate them to pay creditors. Even though you will effectively settle your debt, you will lose your earnings if the business premise or rental property is the only source of revenue in your estate. If the property is registered under your name, it will be disposed to pay the debt, even if it was the sole source of revenue for the family.

You should note that when the value of your rental premise surpasses the bankruptcy exemptions limit, you will not keep the equity. You can only retain the home equity of your primary residence, and any equity above the exemption limit will be turned over because it is an investment that could be used to settle your debt.

If you use your rental income to service your debt on time, the court will let you retain the property. Nevertheless, if you are late with your payments, you will submit the property to the court to evaluate whether the property is worth keeping or foreclosing. All court decisions on property liquidation at this stage are for the creditor’s interest. Therefore, the court will order you to turn it over if your real estate property does not generate income for the creditor or lacks a positive record. The trustee will seize the premises and sell them to raise money for debt repayment.

Chapter 13 Bankruptcy

Declaring bankruptcy under Chapter 13 lets you reorganize your finances when your income exceeds the liquidation bankruptcy limit, and you have a dependable revenue source. The reorganization strategy involves gathering funds and developing a debt repayment plan. Unlike straight bankruptcy, where you cannot repay the debt because your income can only cover daily expenses, Chapter 13 is for individuals with a steady income adequate to pay the debt but cannot organize funds for repayment. Therefore, instead of disposing of your investments to settle debt, this bankruptcy form allows you to advance a debt repayment plan to settle part or total debt over time.

The court will approve your repayment plan if you can prove your income is sufficient and consistent to pay monthly installments for thirty-six to sixty months. The installments will be determined by your earnings, debt amount, and the sum of your unsecured debts.

  1. Eligibility for Chapter 13 Bankruptcy

Not everyone is eligible for bankruptcy. It would help if you met these stipulations for your request to be approved. First, your debt must not exceed the limits provided by the law under debt reorganization. Your debt must be at most the limit of $394,725 for unsecured debts or assets that are not secured using a property.

Similarly, the court requires you to disclose information about your past and current expenditures for a background check. Among the information, you will disclose a detailed list of all your creditors and the amount you owe each. Consequently, you must disclose any property that is registered under your name.

Furthermore, you must submit information about the source of your income and monthly expenditure. The judge relies on this information to establish if you can afford to pay the monthly installments required by the creditors for a duration of thirty-six to sixty months. Consequently, the judge will rely on the amount you have provided as monthly income and compare it with your monthly expenditure to determine if the balance is adequate to cover the creditor’s interests.

Lastly, you could be required to attend a credit counseling plan, primarily if you have a recurring financial hardship.

Debt reorganization under this form of bankruptcy starts when you petition the court. Next, you will involve your bankruptcy attorney to develop a repayment strategy to settle the debt. You will follow the three-year schedule if your gross revenue is below the state average. Nonetheless, you will go with the sixty-month plan when the gross earnings are over the state medium.

Your responsibilities under this chapter of bankruptcy include:

  • Completing the required forms and documents with a bankruptcy court within your location
  • Paying the petition fee
  • Adhering to the planned payment plan

You should know that even after settling your debt under the reorganization strategy, you will still have pending debts. These are:

  • Child support
  • Debts excluded from your wage plan
  • Student loans
  • Alimony
  • Restitution and court fines

Chapter 13 Bankruptcy Effects on Investment Properties

When you want time to reorganize your finances to settle your debts, Chapter 13 is the way to go. The form of debt relief gives you adequate time to formulate a repayment plan that will satisfy the creditor's demands and equally sustain your expenditure. When you have positive property, the court will allow you to keep it under Chapter 13. So, if you have a rental property that generates monthly revenue, the court will order you to retain it, and the revenues generated will be directed towards debt repayment. Unlike liquidation bankruptcy, where you transfer control to a trustee, Chapter 13 allows complete control over the property.

Nonetheless, when the investment incurs losses that could last for the entire five years of bankruptcy, you must surrender it as repayment for your debt. These cases are common where you borrow money to build a rental property or buy an investment, but the returns from the investment are deficient in repaying debt. Keeping an investment like this will not be in the creditor's interest, which is why the judge will not let you retain it. You will not retain an investment, causing the creditor to incur losses.

Sometimes, even when you have relinquished your property to a trustee, the creditor could not be interested in the property as it is insufficient to settle the debt. If you have full ownership of the investment, there is an elevated likelihood that you will retain it and can choose to convert it into cash or lease it. When it is an unoccupied rental property, the court-appointed trustee will allow you to retain it, although you cannot incur any expenditure like maintenance.

Alternatively, the court can rely on good faith to establish whether or not you should retain the damaging record property. Even though they work for the creditor's interest, courts exercise fairness and could be willing to assist you if you are honest about your situation. Nevertheless, before the court exercises these powers, your bankruptcy attorney must convince them that retaining the investment will benefit the creditor and that you will act in good faith. When your attorney successfully applies the good faith test to the unprofitable investment, the judge will be convinced that you are an honest debtor, allowing you to utilize your disposable earnings for debt repayment instead of putting your money in a business that does not generate profits.

Also, under the program, you will retain your primary home residence, as it is exempt. Further, bankruptcy is recommended for married couples and persons who attach great value to their primary homes.

Despite paying most of your debt, Chapter 13 will not repay your education loans, criminal fines, child support, and alimony fees. The primary benefit of this form of bankruptcy is that you retain your investment properties if it is in the interest of the creditor. And even if circumstances force you to foreclose the property, your credit scores will be cleared quickly.

Other Bankruptcy Forms

On top of Chapters 7 and 13, you can reorganize your debt under Chapters 11 and 12. Chapter 11 is for enterprises that are on the verge of collapsing. By filing for bankruptcy under this chapter, you can reorganize your debt and pay the money you owe. Chapter 12, on the other hand, is for families in the fishing and farming industry with an annual income.

Find an Experienced Bankruptcy Attorney Near Me

If your investment is unprofitable to the extent that you cannot service your debt; it does not mean this will be your situation forever. You can explore various bankruptcy options to obtain financial reprieve and avoid dealing with creditors directly. Bankruptcy statutes are complex. You need an experienced professional to guide you through the process. At the Los Angeles Bankruptcy Attorney, we are here to protect your properties when faced with financial hardship. Call us today at 424-285-5525 for a case evaluation.