Practice Tips: Rental Properties in Chapter 13

It is not unusual for a chapter 13 debtor to own one or more rental properties or to have an interest in an LLC that owns the properties.  Rental properties can complicate issues affecting plan confirmation, such as liquidation, disposable income, and feasibility.  Attorneys need to be particularly attentive to a review of documents and preparation of Schedules.  Here are some tips to help you avoid a few common problems I see in my review of Schedules and documents:

• First, be aware that if the property is owned by an LLC, the property is not property of the estate in the individual debtor’s chapter 13 case.  The debtor’s interest in the LLC is property of the estate (see Q.19 on Schedule A/B), but the assets of the LLC are not.

• If the debtor has a fractional interest in the rental property, Schedule A/B must show the value of the property as a whole and the value of the debtor’s interest.

• As you review the deeds and prepare Schedules, try to include the DB/page reference in the description of the property listed in Part 1 of Schedule A/B.

• Note the property address or other identifying information on the copy of each deed you’re providing to my office so we can easily match the deeds to the scheduled properties.

• Schedule all encumbrances against each property on Schedule D – not just mortgages, but delinquent property taxes, judgment liens, tax liens, etc. (and don’t forget that property taxes are secured claims under Kentucky law, not priority claims).

• As you did with the deeds, note the property address or other identifying information on the copy of each mortgage you’re providing to my office so we can match mortgages, scheduled debts, and actual claims.

• Determine if there is a liquidation issue as to each property (not just aggregate property values minus aggregate liens against all properties).  If the case were a chapter 7 case, the chapter 7 trustee could sell the properties with nonexempt equity and abandon those properties that are underwater.  That’s why you need to look at liquidation on a property-by-property basis.  The plan will need to be funded to satisfy the liquidation test.

• Now start working on income and expenses.  Question #5 of the SOFA asks for actual gross income.  You will probably get that information from the debtor’s tax returns.

5. Did you receive any other income during this year or the two previous calendar years? Include income regardless of whether that income is taxable. Examples of other income are alimony; child support; Social Security, unemployment, and other public benefit payments; pensions; rental income; interest; dividends; money collected from lawsuits; royalties; and gambling and lottery winnings. . . .List each source and the gross income from each source separately.

•  On Schedule I, report net income but attach the required separate statement showing the calculation of that net income.  Follow the instructions for Line 8 of Schedule I:

8. List all other income regularly received:               8a. Net income from rental property and from operating a business, profession, or farm.  Attach a statement for each property and business showing gross receipts, ordinary and necessary business expenses, and the total monthly net income.

The statement of business income and expenses does not need to be on any specific form in the Eastern District of Kentucky, but it should be detailed enough to show some basic information as to each property.  For example:

 

Monthly average gross rental income:			$___________
Expenses:
	Mortgage payments:	$___________
	Property taxes:	$___________
	Insurance:	$___________
	Maintenance expenses:	$___________
	Utilities:	$___________
	Other ordinary and necessary business expenses*:
	_____________	$___________
	_____________	$___________
	_____________	$___________
Total Expenses:			$___________
Monthly Net Income:			$___________

*Don’t include “phantom” expenses like depreciation.

• The aggregate monthly net income from all properties should go on Line 8a of Schedule I.

• If the expenses for a rental property exceed the income (negative cash flow), consider whether it is feasible for the debtor to keep the property.  I usually object to the retention of these properties because it is the unsecured creditors who are affected when the plan payment is calculated based on the expenses exceeding income.  But if the debtor has some equity in the property to justify retaining it, they will need to increase the plan payment to cover the operating loss.

Follow these tips and you increase the likelihood of smooth sailing towards confirmation of your chapter 13 plan in the EDKY.