Keeping Non-Home Real Estate through Bankruptcy
Whether you can keep other real estate depends first on whether it’s “exempt.”
Most people thinking about filing bankruptcy either don’t have any real estate or if they do it’s their home. But if you own real estate other than your home you’re really not that unusual. You may have property you bought as an investment or as part of operating a business. Or you may have received it in an inheritance or through divorce. You’re in financial trouble and need help, but if you go through bankruptcy you’d like to keep this property. Can you?
Real Estate with or without Equity
The first issue is whether the real estate is protected from being liquidated for the benefit of your creditors.
Outside of bankruptcy if you fall behind with any one of your general creditors it can sue you, likely get a judgment against you, put a judgment lien on all your real estate, and force its sale to pay the debt. Filing bankruptcy would stop that process at any point. But what happens next depends on 1) whether the real estate has any equity (any value beyond the amount of debt(s) secured by this real estate); 2) if it does have any equity whether that equity is “exempt” or protected; and 3) whether you file a Chapter 7 or Chapter 13 case.
1) No Equity or Very Low Equity: If the real estate has no equity, a Chapter 7 or 13 trustee will understandably not be interested in liquidating it to pay the proceeds to the creditors. Same thing if there is so little equity that the costs of sale would eat up that equity without a meaningful amount left over for creditor distribution to make the effort worthwhile.
2) Exempt Equity: Even if there is some equity, it may be “exempt”—covered by any property exemption that applies. Exemptions are categories of assets, usually up to a certain dollar limit, that are protected from creditors and from the bankruptcy trustees. Exemption amounts can vary widely from state to state. So you need to discuss this with your local experienced bankruptcy lawyer.
In addition, often there are “wild card” exemptions that can be applied to anything you own, such as to your real estate equity even if that real estate isn’t your home and you don’t need that “wild card” exemption for other assets. Also, if you don’t use your homestead exemption on your home—either because you don’t own a home or it has no equity needing protection—you may be able to apply all or part of that homestead exemption to your real estate.
3) Protecting Non-Exempt Equity through Chapter 13: Even if there is equity in your non-home real estate that is NOT “exempt,” you can often protect that equity through Chapter 13. You do this by paying enough into through your Chapter 13 payment plan over its 3-to-5-year lifespan so that your creditors get paid enough. That often requires paying more over time than if you were not keeping and protecting the real estate. But sometimes this does NOT require you to pay any more than otherwise. Again, talk to an experienced bankruptcy lawyer to learn how this would work in your situation.
Surrendering Your Real Estate
If after all this you’re instead inclined to surrender your non-home real estate, there is more to this decision than you might think. We’ll cover this in our next blog post in a couple days.