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Leasing Underwater Property While in New York Bankruptcy Is Usually Not a Good Idea

Frequently, when people file bankruptcy in New York, they don’t have much in the way of assets (e.g., a house and a car), but they do have quite a bit of debt. These cases sometimes have their difficulties, but for the most part a Chapter 7 or Chapter 13 will address the problem.

In other situations, though, the debtors might have quite a bit of property, such as commercial or residential properties that they rent out to tenants. Often these properties will be underwater and the owner will list them on a Chapter 7 petition as an asset with no equity in it, but he or she might nevertheless state an intention to reaffirm the mortgage. In a reaffirmation agreement a debtor promises the creditor that he or she will continue paying on a mortgage, which allows the debtor to take it out of the bankruptcy estate. Once the case is filed, and the first meeting of the creditors has taken place, but before a reaffirmation agreement has been signed, the debtor might want to rent out the underwater commercial or residential property. There are a few good reasons not to.

First of all, until the parties conclude the reaffirmation agreement, the property remains part of the bankruptcy estate. This means the debtor-owner does not have the authorization to sign lease agreements with interested tenants. Even if the owner could sign these agreements, the money would flow straight to the bankruptcy estate and the Trustee’s commission. Indeed, the Trustee isn’t bound to a deadline for deciding to handle any of the bankruptcy estate’s assets, so the Trustee could sell the property before the tenant takes possession. Fortunately, in practice, trustees often don’t care if owners rent out the property even without reaffirming the mortgage. Still, it is a potential legal mess worth avoiding or at least considering.

Second, if the debtor badly wants to start leasing the property, he or she can try to file a motion with the bankruptcy court to order the Trustee to abandon the property. Better yet, the mortgagee can file the motion. There’s no guarantee this would work, but if it does, the owner can sign the reaffirmation agreement and sign on new tenants.

Empty properties don’t make owners any money, and the burden of a mortgage along with property taxes can make them anxious to get the property out of the bankruptcy estate and into the hands of paying tenants. However it’s important for owners to wait until their cases are handled properly before doing so.

For more questions about commercial and residential property in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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