Is Debtor Or Trustee Entitled To Rental Income From Properties Not Included In Bankrutcy Estate?

Because of the depressed real estate market most bankruptcy debtors who own investment rental property have no interest in retaining the property after filing Chapter 7 bankruptcy. The Chapter 7 trustees are rarely interested in administering rental properties as part of the bankruptcy estate because few properties have equity today especially after the trustee considers the costs of marketing, maintenance, and sale. Those properties which are occupied after the bankruptcy filing continue to generate monthly rent. At a recent trustee/creditors meeting I discussed with the Chapter 7 trustee whether the debtor or the trustee is entitled to collect rental income generated from properties which the trustee is not claiming as part of the bankruptcy estate and which the debtor wants to surrender.

The trustee stated that he had been claiming and collecting rents from debtors’ properties. The trustee stated that he usually abandons quickly rental property by filing a notice of abandonment because he does not want personal liability associated with ownership of rental properties. He said that his claim to rent is based upon his right to assets received by the debtor within six months of filing such as inheritances and insurance proceeds. The trustee stated that as a practical matter most tenants stop paying rent when the owner files bankruptcy and the only type of rent he has been able to collect with regularity is rent paid by the government for Section 8 housing.

It seems illogical that a trustee can collect income from an asset which has no equity and is not part of the bankruptcy estate. However, bankruptcy law gives trustees the right to income from all assets owned by the debtor. The trustee has a limited amount of time following the creditor meeting with the debtor to abandon the debtor’s assets, and as stated above, most trustees quickly will abandon rental properties in today’s market. I agree with the Chapter 7 trustee is entitled to rental income received after the debtor files bankruptcy and before the trustee abandons rental property with no equity. After abandonment the property and the right to receive rent reverts back to the debtor. A debtor could keep such properties if they can bring current the mortgage.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida

Comments

[income property]

Due to desperation and depression of bankruptcy, it affects the debtors and the trustee.

[V. Hayes]

I am faced with the situation where there is an assignment of rent and chapter 7 trustee wants the property. Any case law to support your position that the rents are not property of the estate. My argument is that the rents are cash collateral and the trustee has no authority to use the cash collateral.

[William Cottrell]

Would your conclusion that the trustee can collect income from non-exempt property with no equity change if the debtor intended to retain the asset and reaffirm the debt.

wj cottrell

[Russ DeMott]

I recently faced this issue as well. Take a look at the mortgages on the properties. Most (actually, I'll bet all of them) have assignment of rents provisions in them. They state that the rents are assigned the lender, but held in trust by the owner. If so, the interest would not come into the estate.

Russ DeMott