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Catching up on Property Taxes on Other Than Your Home

August 14th, 2017 at 7:00 am

If behind on property taxes on property that isn’t your home, either Chapter 7 or Chapter 13 may buy you the time to save this property. 

 

For most people who are behind on property taxes on their real estate, that real estate is their home. And they have a mortgage on that real estate. See our last blog post about catching up on your property taxes on your mortgaged home.

But you may own real estate that isn’t your home, on which you are behind on property taxes. This comes up in a number of scenarios. Today we’ll look at mortgaged investment property on which you’ve fallen behind on property taxes.

First Problem—The Unhappy Mortgage Lender

Again, see our last blog post about why mortgage lenders get very concerned when borrowers fall behind on property taxes. What we said there about mortgaged homes applies as well to investment and other types of real estate.

Briefly, being behind on property taxes is virtually always a breach of your agreement with the mortgage lender. That’s because the property tax is “senior” to the mortgage, meaning a property tax foreclosure would wipe out the mortgage lender’s lien on the property. That’s very dangerous for the lender, so it acts aggressively to get you current on the taxes. This may include the lender paying the tax and then coming after you to pay it back. And if you don’t the lender can start its own foreclosure, even if you’re current on the mortgage itself.

Bankruptcy can solve this problem, one of two ways. A Chapter 7 case “discharges” your other debts so that you can afford to bring your property tax current. And if that doesn’t happen fast enough, a Chapter 13 case buys you more time, up to 5 years. Your court-approved payment plan gives you an affordable, flexible, and protected way to accomplish this.

Second Problem—Justifying Keeping the Property

The bankruptcy system has no trouble helping you pay debts related to your home. Other real estate can get trickier.

If you have investment property, you may need to justify that it’s financially sensible to keep that property. Specifically, you’ll likely have to justify spending money to catch up on the taxes.

For example, is the real estate worth more than you owe on it, including the taxes? If so, that more easily justifies paying the taxes to save your equity in the property.

Also, does the investment real estate generate a positive cash flow? If so, that also more easily justifies paying the taxes to preserve this positive cash flow.

If your investment property has negative equity and/or negative cash flow, it’s hard to justify keeping the property.

Why Does the Bankruptcy System Care?

It cares for budgeting and liquidation purposes.

To go through a Chapter 7 case you must pass the “means test.” That essentially requires showing that you don’t have the means to pay a meaningful amount to your general unsecured creditors. And that in turn usually requires showing a detailed budget. That budget includes a list of allowed expenses. Depending on the circumstances (including the equity/cash flow issues touched on above), you may not be able to include expenses on a financially unnecessary or unjustifiable investment property.

Under Chapter 13 case you pay what you can afford to pay to your creditors through a 3-to-5-year payment plan. As under Chapter 7, you have to justify paying property taxes on a property that isn’t your home. If that property is generating income and helping to pay the other creditors, putting money into that property to pay its taxes is more defensible. If the property is a cash drain justifying putting “good money after bad” into it would be hard to defend.

As for the liquidation issue, in a Chapter 7 case the bankruptcy trustee can liquidate anything that isn’t protected. The protection is mostly in the form of exemptions—property you’re allowed to keep. The Chapter 7 trustee will be inclined to take and liquidate your investment property if it will generate any cash for your other creditors.

Chapter 13 provides a way for you to protect assets you could otherwise lose in a Chapter 7 case. Essentially you pay more into your payment plan to cover the amount of money would have gone to your creditors in a liquidation of your investment property. That may be feasible, depending on your cash flow and on the liquidation value of that property.

Conclusion

Notice that there are some potential Catch-22s when dealing with investment real estate on which you owe property taxes. For example, having equity in the property makes it more prone to liquidation under Chapter 7, but having no equity makes keeping it and curing the taxes harder to justify. Under Chapter 13, a positive cash flow from the investment is important to justify catching up on the taxes. But there’s a good chance you don’t currently have a positive cash flow but rather are just expecting that to happen when certain things fall into place.

So figuring out how to deal with an investment property with owed taxes involves some careful financial and legal judgment calls. This is exactly the kind of situation you need the good counsel of savvy and conscientious bankruptcy lawyer.

 

Chapter 13 Benefits for Real Estate that Is Income-Producing and Equity-Creating

June 20th, 2016 at 7:00 am

Chapter 13 can be an effective way to temporarily or permanently hold on to business and investment real estate equity and income.

If you own real estate that is not your home, filing a Chapter 7 “straight bankruptcy” would likely result in you losing control of what happens to that real estate. In our last blog post we showed how filing a Chapter 13 “adjustment of debts” case could give you more control over that. Often you have more control over whether the property is sold or retained, whether undesirable real estate can be surrendered to its mortgage holder, and the timing of such events.

Chapter 13 also can also much better protect equity in your real estate from your creditors. If that real estate is producing income for you, Chapter 13 can often protect that income and put it to much better use. Furthermore, because Chapter 13 is much more flexible than Chapter 7, and its protection against your creditors lasts for years instead of just a few months, it can give you the opportunity to build equity in your real estate.

More Benefits to the Real Estate within Chapter 13
—Protecting the Equity

If your real estate clearly does have equity, in a Chapter 7 case you would definitely lose the real estate to the bankruptcy trustee and its sale proceeds to your creditors. After all, Chapter 7 is a liquidation form of bankruptcy, and anything that is not protected through property “exemptions” is usually taken by the trustee and sold to pay your creditors.

Usually real estate that is not your home is not protected by an exemption (although there are possible exceptions in certain states under certain circumstances). So again you’d likely lose such property in a Chapter 7 case.

But what if you needed the real estate for your business? Or what if you had some deep personal or family connection to the real estate?

Chapter 13 allows you to keep non-exempt property under many circumstances. You may well have to pay more or longer into your payment plan to pull this off. But in some situations that may not even be necessary.

Determining whether you can keep real estate that is not exempt, and what you would have to do in a Chapter 13 case to pull that off, requires a rather complicated case by case analysis. So you need to talk about this with an experienced bankruptcy lawyer. The point here is that being able to keep otherwise unprotected real estate is much more likely under Chapter 13 than Chapter 7.

—Protecting Real Estate Income

The minute you file a Chapter 7 case the bankruptcy trustee has a right to all rents and other income from your real estate. This is true even if the trustee later decides to abandon that real estate.

In contrast, under Chapter 13 income from real estate is treated much more like your income from employment. Your income from all sources is used to determine your monthly “disposable income”—your income after expenses—and the amount you can afford to pay into your monthly Chapter 13 payment plan.

There are other considerations—such as whether you can financially justify keeping that real estate going forward. But again it’s much more likely that you would be able to keep, or put to good use, income from such real estate under Chapter 13 than under Chapter 7.

—Creating Real Estate Equity under Chapter 13

One of the ways you can justify keeping real estate in a Chapter 13 case—either permanently or to sell later in the case—is to show that you are building equity in the real estate during the course of the case. You can create equity three ways:

1. The real estate may have liens on it—for property taxes, income taxes, or child support, for example—on debts that you would be paying off during the course of the case. Paying off those debts would result in the release of the liens, building equity in the real estate relatively quickly.

2. Some liens—such as for older income taxes—many not have to paid in full or sometimes even in part. The underlying debt may be discharged—legally written off—resulting in the release of such liens, and resulting in the building of equity in the real estate.

3. If the real estate’s value is rising year over year, over the span of a 3 to 5 year Chapter 13 case equity will be created through that appreciation, along with the reduction in the mortgage’s principal balance during that time.

In a Chapter 7 case, as a liquidation form of bankruptcy that fixates on you and your real estate’s status as of the moment your case is filed, future equity is essentially irrelevant. Chapter 13 can open up opportunities to build such future equity to your benefit. 

 

Selling Real Estate Other than Your Home under Chapter 13

June 15th, 2016 at 7:00 am

Chapter 13 is often a better way to sell real estate, especially if you have other financial complications.

 

Our last blog was about letting go of real estate that is not your home through a Chapter 7 “straight bankruptcy.” We showed how you can escape debts related to the property. We also showed how you could possibly even have your “priority” debts paid by the Chapter 7 trustee out of any proceeds of the sale of that property.

But Chapter 7 provides limited help. It’s appropriate for certain scenarios, generally more straightforward ones. If you own real estate other than your home, there is a good chance that you have complications that would be better handled through a Chapter 13 “adjustment of debts.”

Chapter 13 Better If…

What kinds of complications would make Chapter 13 the better option?

  • if the real estate has equity and you want some control over the its sale and its timing
  • if the real estate has equity and you want some control over who gets paid out of the proceeds of sale
  • regardless whether the real estate has any equity, Chapter 13 gives you important benefits, some related to the real estate and some unrelated

Control Over Real Estate Sale and Its Timing

In a Chapter 7 case if you have any asset that is not “exempt”—protected from creditors—the bankruptcy trustee takes control over the asset. In the case of real estate with equity, the trustee would decide whether your creditors would benefit from its sale. If the trustee decides to sell it, he or she hires a realtor (usually) and goes through the sale process. You would not have any say in that process, other than to respond to the trustee’s requests for information and cooperate with the trustee’s sale. You would generally have little or no say in when the property is sold, how much it is sold for—beyond very broad standards of reasonableness—or to whom it is sold.

A Chapter 13 case gives you much more control over the sale.

Through a formal Chapter 13 plan put together with the help of your attorney, you propose what you want to do with the real estate, when you want to sell it, for how much, and who will be paid from the proceeds.

There ARE a bunch of rules the plan has to follow. Creditors and the Chapter 13 trustee get a say in the process. The bankruptcy judge has to approve the plan, and resolves any disputes about it. But you have much more say about what happens under Chapter 13 than under Chapter 7.

For example, you would likely be able to hire a realtor of your choosing, and decide whether to put some energy and maybe some money into getting the property ready for sale. Depending on the circumstances you may be able to delay marketing the real estate if the property is increasing in value. You may even be able to sell the property to someone you prefer as long as the transaction is otherwise fair. Overall, you are in control of the sale—albeit under the oversight of the Chapter 13 trustee and the bankruptcy court.

Control Over Who Gets Paid from Real Estate Sale Proceeds

In a sale of your real estate within a Chapter 13 case, valid liens against that real estate would of course have to be paid through escrow as usual. Then if you are entitled to any exemption on the real estate (an amount shielded from your creditors) you would be paid that amount out of the remaining sale proceeds.

But because Chapter 13 is an ongoing process involving your income and expenses, you may not be able to keep that exempt amount. You are generally required to pay “into the plan” all your “disposable income” (generally all income beyond your necessary business and personal expenses). But that may be negotiable. For example, if you need to replace your vehicle, or if it or your home urgently needs some maintenance or repair, some or all of the real estate sale proceeds could go towards such necessary expense(s).

If there are any remaining proceeds after that, there are rules in Chapter 13 about which debts are paid ahead of others out of those proceeds. But within those rules there is some flexibility. For example, certain secured and “priority” debts must be paid in full by the end of the 3-to-5-year payment plan, but you may have some flexibility about which ones are paid faster.

An example can show how this could be of significant practical benefit. 

Early in your Chapter 13 plan you may want to earmark money towards a debt that is particularly important to you, say a child support arrearage in order to bring some peace between you and your ex-spouse. Or you may want to start by catching up on property taxes on your home to avoid the high interest rate and to calm down your anxious mortgage lender. Then you could earmark other important but less urgent debts to be paid somewhat later from the subsequent sale proceeds of the (non-home) real estate. For example, you could hold off paying “priority” income taxes until the sale of the real estate. That because those taxes have to be paid by the end of the Chapter 13 case but incur no interest and penalties in the meantime. And the IRS and state tax agency can’t pressure you during the case. 

Chapter 13 Benefits Related and Benefits Unrelated to the Real Estate

Beyond the question of maintaining greater control over the real estate sale process, timing, and payout, Chapter 13 may provide you many other benefits over Chapter 7. Depending on your circumstances, those benefits may tie in with the real estate itself or may be unrelated to it. We’ll tell you about both sets of benefits in our next blog post.

 

Dealing with Unpaid Property Taxes on Your Home

May 18th, 2016 at 7:00 am

Catching up on property taxes benefits both you and your mortgage lender. Chapter 13 helps you pull this off under much less pressure.

 

Slipping Behind on Property Taxes

If you’ve fallen behind on your mortgage payments, you’ve likely also fallen behind on your property taxes.

You may be required to pay those taxes as part of your mortgage payment. So not paying the mortgage automatically means you’re not paying the property taxes.

Or you may be supposed to pay the property taxes directly, separate from your mortgage. So you’ve not paid the property taxes because the mortgage lender is much quicker to complain and makes more noise if you don’t pay the mortgage.  So you pay that as much as you can instead of the property taxes.

Either way you fall behind on the property taxes. So how to solve this problem?

Some Help from Chapter 7 “Straight Bankruptcy”

Two blog posts ago we explained how Chapter 7 can enable people to keep their home as long as they can catch up on their unpaid mortgage payments within a few months after filing their bankruptcy case.

That’s all the harder if you are also behind on property taxes.

But in some situations, the filing of a Chapter 7 case allows a homeowner to stop paying a lot of money each month to other creditors, freeing that money to be paid towards the unpaid mortgage and property taxes.

Your Mortgage Lender’s Harsh Leverage

The problem is the impatience of your mortgage lender.

Usually a foreclosure by a property tax agency does not happen until a number of years after you don’t pay a property tax bill. So you’d think you’d have years to get current.

Maybe so if you own the property free and clear of a mortgage.

But not if you have a mortgage. In the reams of paperwork you signed when you got the mortgage you promised your mortgage lender that you would always keep current on the property taxes. So if you don’t, that’s a breach of your mortgage loan. It gives your lender a separate justification for foreclosing on your home, regardless whether or not you are current on the mortgage payments themselves.

Chapter 13 “Adjustment of Debts” Buys Much More Time

A Chapter 13 payment plan gives you time to catch up on your property taxes. And it keeps your mortgage lender off your back while you do so.

Our last blog post showed how Chapter 13 can usually give you as long as 5 years to catch up on missed mortgage payments. Same thing with back property taxes. And same thing if you are behind on both.

Stretching out the catch-up period that long reduces how much you have to pay monthly, on the property taxes or on both the property taxes and the mortgage. That makes catching up easier. If you are far behind, it may make the otherwise impossible become possible.

Chapter 13 Protects Your Home

Chapter 13 cases usually last 3 to 5 years. If you follow the payment plan that you and your lawyer propose and the bankruptcy judge approves, throughout that time you and your home are protected from foreclosure and other collection activity.

This protection applies both to the property tax creditor and to your mortgage lender. You do need to keep current on new tax years and on new mortgage payments as they come due. And you do need to make your “plan payments” so that you are making progress on the past due property taxes (and mortgage payments, if you’re behind on them, too). Or you could lose this protection and this opportunity to get current over time.

Flexibility under Chapter 13

Although Chapter 13 gives you as long as 5 years to catch up on your property taxes, often you’d be able to pay your back property taxes more quickly. That’s because in your Chapter 13 plan you can usually delay paying other creditors while you first catch up on the property taxes. That’s helpful because property taxes tend to have high interest. Besides saving you on interest, you build equity in your home, and satisfy your mortgage lender more quickly.

Chapter 13 is also a particularly good option if you have other liens against the home, such as a second mortgage, or liens for income taxes, for child or spousal support, for a judgment, or just about any other lien. More about those in our upcoming blog posts.

 

The Homestead Exemption Cap

March 4th, 2016 at 8:00 am

Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.

 

Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.  

Property Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.

Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.

The Homestead Exemption

Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.

At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.

At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.

Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.

The Federal Cap on the State Homestead Exemption

As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.

The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.

This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).

Applicable to High and Unlimited Homestead Exemption States

The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.

This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).

Only Applicable to Relatively Recent Home Purchases

This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).

And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.

The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.

 

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