Bankruptcy is a bigger deal than you think

What every investor needs to know

Real estate investors will inevitably encounter some sort of experience with bankruptcy and it is paramount they have basic knowledge of the different kinds of bankruptcy Chapters and their impact.

Here’s a quick rundown:

Chapter 7 — can only be filed by persons under a certain income bracket; they often refer to this as the liquidation Chapter; cannot get rid of student loan debt or tax debt

Chapter 13 — often referred to as wage earner negation; gives the debtor the ability to spread debt over the course of 3-5 years

Chapter 11 — filed by large businesses and corporations

Chapter 12 — impacts farmers

Chapter 9 — filed by cities and municipalities

Chapter 15 — filed by foreign governments or individuals

Investors are most likely to be impacted by Chapters 7 and 13 in areas like seller financing, purchase of investment property and tenants’ rights.

Eric Nesbitt, P.C. urges landlords to consider the following—

First, upon receiving notice that a tenant or borrower has filed bankruptcy, the landlord or lender must cease all efforts to collect payments from the debtor. Under bankruptcy laws, an automatic stay goes into effect prohibiting all collection actions. This includes calling a tenant to collect rent or mortgage payments, serving him with three-day notice to collect rent, or collecting automatic payments under a mortgage. Severe penalties may be imposed upon a landlord or tenant who violates the automatic stay, including actual and punitive damages as well as attorneys’ fees.

In the landlord/tenant scenario, a tenant has the right to assume or reject a lease.  If the lease is assumed, the debtor must continue to make payments under the lease agreement. If the lease is rejected, such action effectively terminates the lease. If the landlord has a pre-petition eviction judgment against the tenant, he may continue to pursue the eviction process notwithstanding the automatic stay.

With respect to mortgages, the lender is a secured creditor under either a Chapter 7 or Chapter 13 filing.  However, the treatment of the lender may be drastically different depending on the Bankruptcy Chapter filed by the debtor.

While this by no means serves as a complete explanation of how bankruptcy impacts investors it is a great primer.

It is important to remember how each scenario plays out is entirely dependent on the court, they type of Chapter filed and the position of the investor. In all cases it is smart to hire experienced legal representation to protect you and your investments.

For more nuanced information regarding the impact of bankruptcy join us at ICOR’s July meeting.

 

 

July Meeting Agenda & Logistics:

6:00-7:00pm: The Investor Lab — Join us for one or all of the following:

Food Served from 6:00-7:00pm

  • Networking
  • Workshop Troubleshooting Forum
  • "Hot Seat" featuring an expert in deal finding, marketing, financing
  • Team & Resource Building
  • Haves & Wants and Sharing Success

7:00-8:30pm: Main Meeting — Buying Property in Bankruptcy, Tenants in BK & BK and Seller Financing

8:30pm: Continued Open Networking

 

Spotlight
Tuesday, July 7th 

Colorado Springs Monthly Meeting – Buying Property in Bankruptcy, Tenants in BK & BK and Seller Financing
Spotlight
Wednesday, July 8th     

Denver Monthly Meeting – Buying Property in Bankruptcy, Tenants in BK & BK and Seller Financing
(Click For More Information and To Register)
Spotlight
Thursday, July 9th

Northern Colorado Monthly Meeting – Buying Property in Bankruptcy, Tenants in BK & BK and Seller Financing
(Click For More Information and To Register)