Modifying Rental Property Mortgages with Chapter 11 Bankruptcy – San Diego Bankruptcy Attorney

While Chapter 11 bankruptcy is typically utilized by businesses, many individuals also file Chapter 11. Specifically, individuals who own one or more rental or investment properties may often benefit from filing Chapter 11.

With the downturn in the real estate market, many individuals have found that any equity they had in their rental properties has been lost and the properties are now worth less than the amount owed to their lenders. In these instances, individuals may utilize Chapter 11 in order to effectively modify their loans on the rental properties down to fair market value, thereby getting a principal reduction.

In these proceedings, an individual obtains an appraisal on his/her rental properties and requests that the Court reduce the principal balance on the loans down to that fair market value. Lenders will typically present their own fair market valuations for the properties, and the two sides may either negotiate to settle on values acceptable to both, or request that the Court hold a hearing to determine the true fair market value of the properties.

After a fair market value is established, either by negotiation or Court ruling, the loans on the rental properties have new principal balances and, typically, interest rates. The amount forgiven on the principal balance is paid via payment plan, with other unsecured debts such as credit cards, over a period of time, usually five years. These debts typically pay only a small percentage of what is actually owed.

As a result, an individual may benefit from Chapter 11 in order to increase the profitability of his/her rental properties by essentially modifying rental mortgages through the proceedings.

Please note that this is only a general overview of how rental properties may be treated in the Chapter 11 context and does not discuss the other requirements for Chapter 11 proceedings. For more information, please contact us at the VC Law Group via phone at (858) 519-7333 or email at