New Jersey Attorney Details How Chapter 7 Impacts Rental-Investment Properties
Debtor owned rental and investment property is considered an asset and a source of income in a New Jersey bankruptcy case. As a result, I will explain how the courts and the bankruptcy code deal with both issues. I will first explain how the bankruptcy code analyses’ the asset valuation issue.
In a chapter 7, a trustee may sell any unexempt asset with a substantial value. Typically the debtor must provide the trustee with a valuation statement from a licensed New Jersey real estate professional, such as a sales representative, broker, or appraiser. One must determine the equity in the property, which is the retail value minus the mortgage payoff. Thereafter, the trustee will typically permit an additional deduction of 10% of the sale’s value.
Example: One individual who owns 100% of an investment property, files a chapter 7 bankruptcy case.
Property value is $150,000;
Minus the mortgage payoff of 90,000;
Minus $15,000, which is 10% of the cost of the sale of $150,000.
The result after the deductions Is $45,000.00.
Minus the bankruptcy code’s allowable exemptions of approximately $12,725 is $32,275.00. Please note that allowable exemptions vary based on the circumstances of each case.
Based on the above example, the New Jersey chapter 7 trustee will sell the real estate and make an immediate payment of $12,725.00 to the debtor, in the amount of his exemptions. The balance of the $32,275.00 will be distributed to the creditors in the order required under the bankruptcy code. The trustee and his attorney will also be paid from the sales’ proceeds. The debtor will be paid the balance, if any, after the above referenced distributions.
Please note that one should not rely on the figures of the above example, as the figures will change based on numerous facts and each individual’s circumstances. The exemptions that are applied to investment real estate is different than the exemptions that may be applied to your residence. Also, the analysis is different when a debtor owns the house with a spouse or other individual.
As explained in another part of this website, two criteria of a chapter 7 case relate to the household disposable income. Investment and rental property is a source of income that must be considered as additional household income. As a result, one must determine the monthly income that is derived from the property, which is the rent received minus all property expenses, including: mortgage; property taxes; insurance; maintenance; estimated income tax, etc. The income must be added to the other household income in connection with, both, the current monthly income (means test) analysis and the future income and expense analysis. In general, if either analysis results in disposable income, the debtor does not meet the chapter 7 criteria.
Robert Manchel, the New Jersey bankruptcy lawyer, may be contacted at (866) 503-5655, to discuss your options.