Declaring bankruptcy offers an effective way to regain financial freedom if you are burdened with an overwhelming amount of debt. However, there is quite a bit to consider before filing, especially if you own rental property. It’s important to understand how rentals are treated in a bankruptcy to determine whether you can keep your property. One of the main deciding factors will be which chapter you choose to file.  

How Filing Bankruptcy Affects Rental Property 

Keeping Rental Property in a Chapter 7 Bankruptcy 

In a Chapter 7 bankruptcy, your real and personal property may be seized by the bankruptcy trustee and sold to pay off your creditors. Exceptions to this apply to any property that is considered exempt under state or federal law.

Home equity is usually included in the list of exemptions, but this only refers to a property you use as your primary residence. This means it won’t protect rental property. Although if there is little to no equity in the rental, the trustee may decide not to sell it. You might also have the opportunity to protect a small amount of equity in your rental by using the wildcard exemption. 

Keeping Rental Property in a Chapter 13 Bankruptcy 

In contrast, assets aren’t sold in Chapter 13 bankruptcies. Instead, you may keep all your property while reorganizing the debt you owe into an affordable payment plan. You will be financially responsible for paying your creditors an amount equal to the value of your nonexempt assets.

If your rental has negative cash flow, your bankruptcy case may be dismissed until the property has been surrendered. This is because you can’t pay as much into your repayment plan if the property is losing money. Sometimes, rental property can be retained by cramming down the mortgage to generate positive cash flow. 

If you have a rental property you don’t want to lose in a bankruptcy, it’s best to explore your options with an attorney experienced in this area of law. The legal team at Bueker Law Firm can help identify if Chapter 7 or Chapter 13 bankruptcy is best suited to your specific financial situation. Specializing in bankruptcy, foreclosure, and repossession, they have assisted numerous Stuttgart, AR residents in their efforts to achieve debt relief. Call (870) 673-1313 to discuss your case or visit them online to learn more.