Bankruptcy is a serious situation. When you file for bankruptcy, you are basically saying that you can no longer service your debts. There is no way that our legal system will allow you to profit through the bankruptcy process. If it did, then everyone would rack up debt and file for bankruptcy. Then our economy would be destroyed. For this reason, the courts examine your financial affairs quite closely and any investments you have will draw even closer scrutiny.
Under a Chapter 7 bankruptcy petition, you are really saying you have only enough income to live on and that servicing your debts is impossible. Under the provisions of the Chapter 7 framework, the bankruptcy court’s trustee has the right to enter any property you own and to take possession of any assets that are not exempt. These assets are then sold and the funds used to pay off some of your debt.
When it comes to investments, and this includes investment properties, the trustee will also seize these for sale. This is despite the fact that those investments are earning an income.
Under the provisions of a Chapter 13 bankruptcy petition, whether or not you retain that property will depend on two things – the first is whether it is making a profit or a loss. If the property is making a loss and that loss is expected to last the three- to five-year period of the bankruptcy, then you will most likely have to sell that investment. This normally occurs in situations where funds were borrowed to purchase the investment and the return is not sufficient to pay back that borrowed money.
If the investment is making a profit, then that profit will be added to your disposable income and used to repay your debts. If you own the investment outright, then you have a better chance of keeping it. If it is real estate, and it is currently untenanted, the trustee may accept this situation, however, you will not be able to spend any money on maintenance or refurbishments.
In some situations, your investments are seen as a positive in bankruptcy so you will be allowed to keep them. In other situations, the investment is seen as a negative and it will need to be disposed of.
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