Will I have to sell my primary home, rental property or vacation home if I file for bankruptcy?

Will I have to sell my primary home, rental property or vacation home if I file for bankruptcy?

The answer depends on the amount of equity you have in each type of property, and on the kind of bankruptcy relief you decide to pursue.

Georgia Code Section 44-13-100 provides a homestead exemption that allows a debtor to protect from creditors $21,500 equity in a primary residence ($43,000 for a couple filing a joint bankruptcy). Debtors are not entitled to claim the homestead exemption for vacation property or rental property.

Debtors who own vacation property or rental property can claim, however, a “wildcard” exemption of up to $10,000 ($20,000 for joint filers) in any unused homestead exemption. In some cases, it may be possible to protect unexempt equity in vacation property or rental property by offering the trustee exempt property of sufficient value.

In a Chapter 7 liquidation bankruptcy, the bankruptcy trustee is legally authorized to sell your primary home, vacation home and rental property — and distribute the proceeds to creditors — unless your equity in these properties is less than the exemptions provided by Georgia law.

In the case of a Chapter 13 bankruptcy proceeding, the rules are somewhat different. Instead of selling nonexempt equity in the real estate, which would have occurred in a Chapter 7 bankruptcy, the debtor must include in the Chapter 13 payment plan payments to unsecured creditors equal to the amount of the nonexempt equity.

Rental property and vacation property stand on an entirely different footing than the debtor’s primary residence.

For rental property, the bankruptcy trustee will likely allow the debtor to keep rental property if it is generating income that can be used to pay unsecured creditors. Rental property that has a negative cash flow impairs the debtor’s ability to pay creditors, so the bankruptcy trustee will likely require that it be surrendered. It is possible, in some cases, to improve the financial health of a rental property via a “cramdown” (in cases where the outstanding mortgage exceeds the value of the property) or by stripping junior lien holders.

In the case of vacation property — that is, a second home that is not paying for itself via rentals — a Chapter 13 payment plan that proposes continuing monthly payments for this luxury will likely attract an objection from the bankruptcy trustee or unsecured creditors. Rarely will a bankruptcy trustee allow the debt to keep a vacation home while asking unsecured creditors to take less than they are owed. The bankruptcy trustee cannot force you to sell your vacation home, but they can refuse to approve your Chapter 13 payment plan unless you surrender it.

The only exception is the rare “100 percent plan” that proposes giving unsecured creditors everything that they are owed. In that case, the bankruptcy trustee would have little reason to object to a plan that allows the debtor to continue ownership in a vacation home.

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