Many people look to make extra income and secure their retirement by purchasing real estate and then renting it out.
Perhaps, in addition to your house, you’ve got a duplex that provides a steady stream of residual income and the future promise of a big payday when you sell.
But what happens if the plan goes awry?
Real estate bankruptcies were the driving force behind the Great Recession of 2008, and it’s a risk that looms over every middle-class investor today.
Let’s say you get laid off and have difficulty finding another job. Or perhaps a medical emergency causes available funds to run out. These misfortunes are all too common. When faced with real estate bankruptcy, be aware of some nuances to the law that could work for your benefit.
The acronym to remember is SARE—single asset real estate. The U.S. Bankruptcy Code defines it as:
“real property constituting a single property or project…with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted… other than the business of operating the real property and activities incidental.”
Roughly translated, that means SARE applies to you, but not to the family farm. Nor does it apply to the golf club renting condos on their property, while generating substantial income on other activities. And it doesn’t apply to the developer who owns a sky-rise apartment complex with hundreds of units.
In a SARE case, the real estate owner and debtor have a 90-day window where a court-ordered stay will protect the property from foreclosure. The debtor is obliged to present a realistic plan for paying back the money owed. The definition of “realistic plan” will vary depending on the judge.
The 90 days present the debtor an opportunity to take a deep breath and come up with a plan for moving forward. Understanding this nuance of the Bankruptcy Code might not solve your problems, but it will ensure you don’t rush into a foreclosure that might have been avoided.
For more help in this area, please check out Bankruptcy Legal Guide.