Chicago Bankruptcy Basics: Real Property in a Chapter 13 bankruptcy.

Chicago Bankruptcy Basics: Real Property in a Chapter 13 bankruptcy.  In bankruptcy, the term real property refers to any "chunk of dirt" that the filer has any legal interest in.  In most Chapter 13 cases, this is limited to the residence of the filer, but it often includes one or more investment properties, time shares, cemetary plots and jointly held pieces of real estate.  How these pieces of real property are treated within a Chapter 13 bankruptcy depend greatly on the type of property it is, the value, the amount owned and how much debt, if any, is owed on the property.

When you file for Chapter 13 bankruptcy protection in Chicago, you are required to schedule all pieces of real property that you have an interest in, the current value of the real estate and the debt owed on each (if any).  For any pieces of real property on which debt is owed, the debt must be treated within the Chapter 13 plan of reorganization.  For properties that you do not wish to keep, this is very simple.  The property is scheduled to be surrendered within the bankruptcy and the lender will be permitted to foreclose on the property and file an unsecured claim for any remaining balance owed to them (known as a deficiency balance).  For properties that are being kept, the process becomes more complex.

If the property being kept in Chapter 13 is the filer's residence, then the plan must account for any mortgage arrears on the property to be paid.  If there is a second mortgage or home equity line on the property, a determination must be made as to whether there is any value for that debt to attach to.  If not, then that debt can usually be removed from the property and treated as an unsecured debt by a process known as lien stripping.  If there is equity for that debt to attach to, then that debt must either be brought current and maintained or paid in full within the Chapter 13 plan.

If the property being kept in the Chapter 13 is not the filer's residence, then there are several options.  The property can be crammed down, meaning that the filer only pays off what the property is worth within the plan of reorganization and the rest of the debt on the property is discharged.  If this is not feasible, then the property can be treated similarly to a residence and any arrears can be cured, current payments maintained and wholly unsecured junior mortgages removed. 

The Chapter 13 trustee will also review whether or not they believe it is reasonable for a filer to keep a piece of real estate at the expense of other creditors.  Attempting to keep a "luxury item", such as a time share or vacation home, may require the filer to pay all of their debts within the plan of reorganization.  The same is true for attempting to keep an investment property that is vacant and generating no income.  The trustee will also do an equity analysis of each property to ensure that unsecured creditors are treated as well in the Chapter 13 as they would be in a Chapter 7, where the trustee could sell any non-exempt property and use the proceeds to pay off unsecured creditors.

Properly addressing real estate holdings in Chapter 13 requires the representation of an experienced Chicago bankruptcy attorney.  A good bankruptcy lawyer will be able to advise you on the various treatments of real property and help determine which treatment is the best given the specific facts of your case.  They will know what objections the trustee will raise and explain to you how they will be addressed.  The Chicago bankruptcy lawyers at Ledford & Wu each have years of experience dealing with real estate issues and are happy to offer a free consultation to determine whether or not filing for Chapter 13 bankruptcy protection is the right option for you.

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