Most of the time, a New York bankruptcy will involve at most only one property, but it’s not unusual for debtors to own more. I’ve touched on the topic of investment properties before, but the topic of second homes or vacation homes is a little different because it’s more personal. So, what happens to them?
Obviously, in a chapter 7 New York bankruptcy, the second home is considered an asset just the same as the principal residence. If the debtor’s homestead exemption is sufficient to cover the equity, it’s out of the bankruptcy, but if not, the trustee will sell the home to repay the creditors.
For this reason, many debtors with multiple homes instead choose to file in chapter 13, which is more plausible given that debtors are more likely going to try to sell a second home to satisfy other debts. In this case, though, the process works differently. Recall that a chapter 13 plan must pass three tests, one of which is the “best interests of the creditors” test. Meeting this requirement means that the debtor’s repayment plan must distribute as much or more to the creditors as a chapter 7 bankruptcy would.
For example, if the equity in the second house is worth $100,000 and the plan calls for repaying the unsecured creditors anything less, then the bankruptcy court will not confirm the plan. Consequently, there are, then, two alternatives. One, the debtor can just liquidate the house, which may or may not accompany a chapter 7 bankruptcy. Two, the debtor can propose higher plan payments to equalize the benefits to the unsecured creditors.
Sometimes the issue of second homes comes up for debtors with substantial assets (and debts), including privately held businesses of various sizes. For them, chapter 11 New York bankruptcy might be appropriate. Indeed, chapter 13 is debt-limited, so debtors who owe more than $383,175 in unsecured debts or $1,149,525 in secured debts may not file in chapter 13. If their incomes are too high for chapter 7, then chapter 11 will be their only option.
Debtors who own more than one piece of real estate will benefit substantially from working with an experienced New York bankruptcy lawyer, especially if a chapter 11 case is on the table. My practiced is experienced in all chapters, even chapter 11.
For answers to more questions about 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.
