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A second home will not be seized in a Chapter 13 bankruptcy, however the fair-market value of the property above and beyond the value of any available statutory exemption must be paid to your unsecured creditors through your Chapter 13 Plan.
CHAPTER 13 BANKRUPTCY: NO PROPERTY SEIZURE
One of the key benefits of a Chapter 13 bankruptcy over a Chapter 7 bankruptcy is that no assets are seized or liquidated in Chapter 13 bankruptcy proceedings.
In a Chapter 7 bankruptcy, personal and real property owned by the individual filing the bankruptcy is seized by the Chapter 7 Trustee assigned to the case by the US Bankruptcy Court if it is worth more than the exemption available under the Bankruptcy Code or Michigan state law for that type of property.
Once seized the Chapter 7 Trustee sells the property off and uses the funds received to repay in part or in full the creditors of the debtor.
It is for this reason that a Chapter 7 bankruptcy is known as a “liquidation bankruptcy.”
A Chapter 13 bankruptcy, on the other hand, is known as a “reorganization bankruptcy.”
This is because the point of the Chapter 13 is not to liquidate property but to prioritize—to reorganize—the debts of the debtor so that certain obligations such as child support arrearages are paid in full before lower priority debts, such as credit card balances or hospital bills, are paid anything at all.
In a Chapter 13 bankruptcy, no assets need to be liquidated because the debtor filing the Chapter 13 repays some or all of what he or she owes to his or her creditors through a 3-5-year-long “Chapter 13 payment plan.”
This repayment occurs through the payment of monthly plan payments to the Chapter 13 Trustee, whose job is to then disburse the funds out to the debtor’s creditors according to the terms and prioritization of debt in the Chapter 13 payment plan.
The Chapter 13 Trustee lacks the statutory authority to seize and liquidate the assets of the debtor.
What the Chapter 13 Trustee can and will do, however, is object to the Bankruptcy Court’s “confirmation” (approval) of the Chapter 13 plan if it fails to comply with the requirements of the Bankruptcy Code, the Federal Bankruptcy Rules of Procedure, and the Court’s Local Rules.
From these sources of authority arises this general rule of Michigan Chapter 13 bankruptcy proceedings: unless it comes with no monthly average cost whatsoever, you will not be allowed to retain a parcel of real estate that is not your primary residence if it isn’t generating income to fund your Chapter 13 plan.
CHAPTER 13 BANKRUPTCY: OBLIGATORY SURRENDER OF PROPERTY
If you own a rental property or a vacation home, or even a timeshare, it is true that it will not be seized from you and sold off in a Chapter 13 bankruptcy.
However, the basic premise of a Chapter 13 proceeding is that a debtor is allowed to “reorganize” his or her debts if paying the entirety of their income for 3-5 years into their Chapter 13 payment plan.
If some percentage of the debtor’s income is expended on non-necessary expenses or luxury expenses, the debtor is maintaining that expense at the expense of the debtor’s creditors in the Chapter 13 context.
This is because the Plan payment that the debtor makes each month to the Chapter 13 Trustee is the equivalent of the debtor’s net monthly income: what is left over after the debtor’s necessary household living expenses are accounted for out of the debtor’s take-home pay.
In Chapter 13, you are not allowed to deduct from your Plan payment amount with non-necessary household expenses of any sort.
For example, a line-item on Schedule J (monthly average expenses) of your Bankruptcy Petition for “comic book purchases” would not go very far in a Chapter 13 proceeding. The Trustee would file an Objection, arguing that comic book purchases are not necessary expenses.
What is and what is not a “necessary household expense” has been the subject of much litigation in bankruptcy courts around the country for many years.
However, in the US Bankruptcy Court for the Eastern District of Michigan, a non-primary residential parcel of real property, if costing the debtor money to maintain—even if merely in terms of annual property taxes, insurance, and maintenance cots—must either be generating some or all of the income funding the Chapter 13 plan or it will be deemed non-necessary and a drain on the bankruptcy estate. (If it something like a beach cottage or vacation home, it is clearly within the “luxury” spectrum.)
If that is the case, the debtor will be required to “surrender” the property in order to obtain a judicial Order confirming and approving the Chapter 13 Plan.
RETAINING NON-PRIMARY RESIDENCE REAL ESTATE IN CHAPTER 13 BANKRUPTCY
This all being the case, it is not impossible to retain an investment property or vacation home or other non-primary residential parcel of real estate in Chapter 13.
The key is, as noted above, that it must be income-generating.
Investment properties generally are. But they are not always sufficiently income generating. On a monthly average basis, calculating in all annual expenses of the maintenance of the property, the property must generate at least $1.00 more than it costs the debtor in rents or other revenue.
Other sorts of secondary properties may not be income generating. Vacation homes, cottages, hunting property, vacant land, and timeshares are all examples of properties owned that are not investments.
More problematic are inherited properties that may be co-owned with a sibling or other family member the residents of which may be that sibling for family member.
Obviously, one solution is to go ahead and surrender the secondary property, relinquishing it back to the mortgage holder (if there is one) and discharging any personal liability for the mortgage in the bankruptcy.
This is not so simple if there is no mortgage on the property. Who do you surrender it to? If you stop paying property taxes, it will eventually suffer a tax foreclosure.
The better option may be to consider renting the property out prior to filing the bankruptcy or to even consider moving into it and making it your primary residence.
However, the devil is in the details. These are options best discussed with an experienced Michigan Chapter 13 bankruptcy attorney.
One crucial aspect of real estate ownership in Chapter 13 is the fact that, just because it cannot be liquidated in a Chapter 13 as in a Chapter 7 bankruptcy, there remains a cost of ownership. Whatever the fair-market value of the property above and beyond the value of any available statutory exemption (yes, you must still list, value, and exempt—if possible—your property in a Chapter 13 just as in a Chapter 7!), that amount must be paid to your unsecured creditors through your Chapter 13 Plan.
Thus, for example, if you own a property worth $100,000 without any mortgage encumbering its value, you will be required to likely pay nearly that entire amount to your creditors in order to have your Chapter 13 Plan confirmed as there is no “homestead exemption” available for an investment or other “luxury” property. (The homestead exemption is available only for primary residences.)
MICHIGAN CHAPTER 13 BANKRUPTCY & INVESTMENT OR VACATION PROPERTIES: THE BOTTOM LINE
The bottom line is that, if you are considering filing for bankruptcy and own real estate other than the home that you reside in, you need to consult an experienced Michigan Chapter 13 bankruptcy attorney to assist you.
Attorney Walter Metzen is a Board Certified Bankruptcy expert and has assisted thousands of consumers with Chapter 7 and Chapter 13 bankruptcy filings in Michigan.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.
