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cfortunato
cfortunato, Attorney
Category: Bankruptcy Law
Satisfied Customers: 8023
Experience:  Bankruptcy professor.
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I own three (real estate) properties in Florida, one of which

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I own three (real estate) properties in Florida, one of which used to be my personal residence. I accepted an offer of employment in New York and relocated there a year ago in July 2012. All three of the properties are in foreclosure and due to the dramatic drop in market value and accumulated interest and fees, the estimated total value of the properties is only $563,292, but my total indebtedness is $1,502,507.

Furthermore, my former main residence (no longer a homestead) has a second mortgage (HELOC) with a principal balance of $182K, and the bank sued my wife and I on the note outside of the foreclosure and so we now also have a $254K judgment. This judgment has prevented us from selling the house through a short sale- even though we had a well-qualified buyer and a sale price that covered the principal of the first mortgage lender.

All things considered, my wife and I have considered many different ways to "sell our way out" of the situation by liquidating the properties through short sales, but when we consider the possibility of future deficiency judgments and the fact that we cannot even sell one of the houses without first settling a $254K judgment - chapter 7 seems like the cleanest and most effective way for us to go. We have no car loans, and no active credit card accounts - just another judgment for an old credit card account of $12K and an old business collection account for $46K.

We consulted with a local bankruptcy attorney, and he prepared a petition, but he is concerned that the trustee will balk at granting us a chapter 7 because of my high income. He advises that we do not pass the "means test" and recommends that we submit a Chapter 7 for business by considering all of our properties as investment properties. However, the attorney seems concerned that our income might disqualify us for a chapter 7 and seems hesitant to submit our petition - my sense is that he has never quite seen a case like ours (high-income, little or no typical consumer debt, etc.) and this makes us a bit nervous.

So, my question is: based on our current level of real estate "negative equity" (over $1 million) does our attorney's concern seem justifiable or unfounded if we submit a Chapter 7 petition as a business?

Also, would we be able to do chapter 13 as a fallback? If so, would it eliminate any deficiency judgments and the summary final judgment granted the second mortgage holder?
Submitted: 8 months ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 8 months ago.

cfortunato :

Hi - my name is XXXXX XXXXX X'X a Bankruptcy and Consumer Protection attorney here to assist you.

cfortunato :

Is it clear that what you currently owe for your two investment properties is more than what you owe for the property that was your residence, in addition to the total of your other personal debt?

cfortunato :

In other words, is it clear that the debt your incurred for business purposes is greater than the debt you incurred for personal purposes (including your prior residence)?

Customer:

Yes, the total business related debt is $823,067. The total debt on our personal residence and other minor consumer debts is $739,889.

Customer:

By the way, since we no longer live in our former residence, and the county has withdrawn or homestead exemption, can we include it as a business debt since it is now technically available to be rented?

cfortunato :

Thank you for your response.


Because your business debts clearly exceed your personal debts, you do not have to worry about filing a Chapter 7, even though you do not pass the Means Test - because of your income. This is because Chapter 7 filers with business debts greater than personal debts do not have to pass the Means Test.


 

cfortunato :

And yes, if there was a problem with passing the Means Test (which would not be the case with you), a Bankruptcy filer would be allowed to convert the case to a Chapter 13.

cfortunato :

The amount owed for your former residence would not be considered to be business debt - even though you are no longer living there, and even if you rented out the home,

cfortunato :

because the Bankruptcy court looks at what the debt was incurred for at time the debt was incurred - not at the time the Bankruptcy was filed.

Customer: Ok, Chris that was very helpful. My last clarification is: so even though our old residence is personal debt, the negative equity and potential deficiency judgment will be eliminated in the Chapter 7, right?
cfortunato :

Yes - even though your debt is primarily business debt, your personal Bankruptcy will discharge both your business debts and your personal debts - including the balance of what is owed for your former residence.

cfortunato :

If your Bankruptcy is filed before the lender gets a deficiency judgment, the Bankruptcy will prevent the lender from getting a deficiency judgment.

cfortunato :

If your Bankruptcy is filed after the lender gets a deficiency judgment, the Bankruptcy will discharge the judgment.

cfortunato, Attorney
Category: Bankruptcy Law
Satisfied Customers: 8023
Experience: Bankruptcy professor.
cfortunato and other Bankruptcy Law Specialists are ready to help you
Expert:  cfortunato replied 8 months ago.

Yes - even though your debt is primarily business debt, your personal Chapter 7 Bankruptcy will discharge both your business debts and your personal debts - including the balance of what is owed for your former residence.
If your Bankruptcy is filed before the lender gets a deficiency judgment, the Bankruptcy will prevent the lender from getting a deficiency judgment.

If your Bankruptcy is filed after the lender gets a deficiency judgment, the Bankruptcy will discharge the judgment.

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