January 26th, 2010 by Reed Allmand 
Holding rental property when filing bankruptcy can impact your “means test” and your post-bankruptcy fresh start depending on the circumstances surrounding that property. Let’s take a look at a few scenarios:
- If you have a rental property with a paying tenant, the rent received will be counted towards your income. This fact alone could cause you to “fail” the means test which would mean that you would need to file Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. This may not be such a bad thing, if you were planning to file Chapter 13 bankruptcy anyway.
- If your rental property’s mortgage is delinquent and foreclosure is imminent, it might be wise to serve the tenant notice before bankruptcy and “voluntarily surrender” the property during bankruptcy. This works for many debtors in bankruptcy because it insures that there will not be a post-bankruptcy foreclosure. And if you are dependent on rental income to make your mortgage, a post-bankruptcy foreclosure could be a real danger.
- Other debtors may choose to sell the property before they file bankruptcy. If the property has lost value and you’re upside-down on your mortgage you can do a short sell and discharge the balance you owe the mortgage company in bankruptcy. Remember, if you have a tenant, you will need to give them proper notice before any sell or voluntary foreclosure.
One word of caution, some debtors attempting to beat the market have engaged in “owner-financed” deals with their tenant. If that sounds like you, this transaction will be treated like business income and you may have difficulty getting out of the contract agreement with your tenant considering that they have an interest in the property. Please speak with your Dallas-Fort Worth bankruptcy attorney to find out how to handle your special real estate issues during bankruptcy.
About Reed Allmand
Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."
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