When a debtor in Wall Township, New Jersey, files bankruptcy, it commonly means that he or she has crippling debt. However, some people hesitate to file if they own rental properties, wondering what would happen to them. Being able to retain rental properties depends on the type of bankruptcy a person files, and he or she could apply for exemptions.
Assets in Chapter 7
Chapter 7 bankruptcy requires debtors to sell nonexempt assets to erase certain unsecured debts, which include medical bills and credit card debt. Exempt property includes what the debtor needs to live, such as clothing, a vehicle and a primary home.
Nonexempt assets include things the debtor doesn’t need to live, such as second vehicles, second homes, valuable artwork and jewelry. The funds from sales go toward paying debt, and the debtor gets a discharge, usually within four to six months. However, debtors must pass a means test to ensure they aren’t abusing the system.
How to keep rental property with Chapter 7
Under current bankruptcy law, someone who files for Chapter 7 may have to sell his or her rental property unless he or she can exempt it. Exemptions allow a debtor to protect nonexempt property up to a certain dollar amount.
Sometimes, if a property has little equity, or the mortgage minus value, the trustee may decide not to sell it. If the property has substantial equity, the debtor could apply the wild card exemption to the equity.
Some states don’t recognize federals emotions, but New Jersey allows the federal wild card exemption of $1,325. If the debtor has an unused amount of homestead exemptions, he or she may apply up to $12,500 under federal exemptions to any property. However, the debtor still must keep making payments on the property to avoid foreclosure even on discharged mortgages.
Rental properties present a special concern during bankruptcy, especially for tenants. A debtor may consider Chapter 13, a bankruptcy that restructures debts into manageable payments. It doesn’t require selling property, but the debtor should seek an attorney’s advice.