"Can I file bankruptcy and keep my rental property?" Often, yes, but it is harder than keeping your home. California's homestead exemption protects only the place you live, so equity in a rental is mostly unprotected in Chapter 7. Chapter 13 usually gives landlords a better chance, because you keep the property and pay creditors the value of that equity over time.
If a condo or former home you rent out in Pleasanton, Livermore or elsewhere in the East Bay is part of the picture, call (415) 754-0115 to start with a free consultation, or reach us online, and bring the mortgage statement, the lease and a recent value estimate.
Why a rental is treated differently from your home
Bankruptcy exemptions decide what you keep. California lets filers choose between two exemption systems:
- The homestead system can protect substantial equity, but only in your principal residence.
- The alternative system has a smaller residence exemption plus a "wildcard" that can apply to any property, including a rental.
A rental property therefore usually depends on the wildcard, which is limited, or on having very little equity to begin with. The combination you choose must work for everything you own, so a landlord's exemption decision should be made with the whole balance sheet in view. Our guide to California bankruptcy exemptions explains both systems.
Keeping a rental in Chapter 7
A Chapter 7 trustee's job is to turn non-exempt assets into money for creditors. With a rental, the trustee asks one question: after the mortgage, sale costs and any exemption, would a sale produce meaningful money for creditors?
If there is little or no equity
If the property is underwater or the equity would be consumed by the loan and sale costs, a trustee will usually abandon it. You can keep it as long as you keep paying the mortgage, property taxes and insurance. Your personal liability on the loan can be discharged, but the lender's lien remains, so missing payments later can still lead to foreclosure.
If there is significant equity
The trustee may sell the property, pay the lender, give you any exempt amount, and use the rest for creditors. In some cases, owners or family members negotiate to buy the estate's interest instead.
What happens to the rent
Rent generated by estate property after filing can belong to the estate while the trustee administers the property. That can affect cash flow during the case, and the security deposits you hold for tenants still need to be handled properly.
So, can I file bankruptcy and keep my rental property in Chapter 13?
Chapter 13 is usually the stronger tool for landlords who want to hold on. You keep all of your property, and your plan must pay unsecured creditors at least what they would have received if the non-exempt equity were liquidated. In effect, you buy back the equity over three to five years.
Advantages specific to investment property
- Curing arrears. Missed mortgage payments on the rental can be spread over the plan while you resume regular payments.
- Loan modification in the plan. The protection that prevents a Chapter 13 plan from changing a mortgage applies only to your principal residence. On a rental, a plan may be able to restructure the loan, subject to the rules on secured claims, which often require paying the secured value within the plan term.
- Junior liens. A second loan on a rental that is completely unsecured because the first loan exceeds the property's value may be treated as unsecured in the plan.
The role of rental income
Rent counts as income for the plan. A property that covers its own mortgage, taxes, insurance and upkeep can help fund the plan. One that loses money every month may make the plan harder to confirm, and the trustee will look closely at your budget. Chapter 13 also has debt limits, and large mortgages on several properties can push a filer over them.
Bob Somal handles Chapter 7, Chapter 13 and foreclosure defense for individuals and small business owners throughout Alameda and Contra Costa Counties, so the rental, the mortgage and any foreclosure deadline can be analyzed together.
When letting the rental go is the smarter move
Sometimes the property is the problem. If it is underwater, needs major repairs, or drains cash every month, surrendering it in bankruptcy can end your personal liability on the loan and stop the losses. Others sell before filing, though a pre-filing sale raises its own questions about the proceeds and how they are used. If a foreclosure sale date is already set, read our article on whether bankruptcy can stop foreclosure.
What an attorney needs to evaluate the property
The answer for any landlord turns on a handful of numbers, so gathering them early makes the first meeting far more productive:
- A realistic current value, such as a recent broker opinion or comparable sales.
- Payoff figures for every loan and any HOA or property tax arrears.
- Current leases, rent rolls and the security deposits you hold.
- Twelve months of income and expenses for the property, including repairs.
- How title is held, and whether a spouse, relative or entity is on the deed.
Frequently asked questions
What if the rental is owned by my LLC?
Then the LLC owns it, not you. Your membership interest is your asset, and the property is not directly in your case, though its value still matters.
Can I evict a tenant during my bankruptcy?
As landlord, you generally can, but if the property is being administered by a trustee, speak with your attorney first.
What if I live in one unit of a duplex?
The part you occupy may qualify as your residence. How exemptions apply to the rest is fact-specific.
Does the means test count my rental income?
Yes, net rental income is generally included in current monthly income.
Whether you want to keep one rental or several, the right chapter and exemption choice make the difference. Call The Somal Law Firm at (415) 754-0115 or schedule your free consultation. Bring loan statements, leases and tax returns showing rental income, and you will get a clear explanation of what keeping the property would involve.
Attorney Advertising. This article is general legal information for Bay Area residents, not legal advice, and does not create an attorney–client relationship. Every situation is different — please consult a licensed attorney about your specific circumstances.