Rent-Stabilized and Rent-Controlled Leases in Chapter 7 bankruptcy

We received a tremendous response to our Cooler e-mail "Covet Thy Neighbor's Apartment," which discussed the attempts of Chapter 7 Bankruptcy Trustees to assume and assign rent-stabilized and rent-controlled leases for the benefit of creditors.

We believe that the following factors are important in determining whether a Chapter 7 Bankruptcy Trustee will attempt to assume and assign the lease to a rent-stabilized or rent-controlled apartment:

1. How many years has the Debtor lived in the apartment?

2. How much rent is the Debtor paying under the rent-stabilized or rent-controlled lease, and what would be the market value rent if the apartment was vacant and not rent-stabilized or controlled?

3. Is the apartment in a gentrifying area or an upscale neighborhood?

4. Has the apartment building recently undergone a condo or co-op conversion?

5. If yes, did the Debtor decline to buy the unit, and therefore become a non-purchasing tenant?; and

6. If the Debtor is married, did the Debtor's spouse also file for Chapter 7 bankruptcy protection?

If you're considering bankruptcy and have a rent-stabilized or rent-controlled apartment, you should contact Jim Shenwick.

Relief of indebtedness income in 2013

Here at Shenwick & Associates, our practice is limited to bankruptcy and real estate. So the intersection of the two, distressed real estate, is our specialty. Many homeowners are suffering from the triple threat of stagnant wages (or unemployment), depreciating home prices and burdensome monthly mortgage payments. Some homeowners have been fortunate enough to have their lenders restructure their mortgages. And others (who are not so fortunate) have had their homes foreclosed on, and have had some or all of their mortgage debt forgiven.

But, as with most good things in life, there's a catch. Under § 108 of the Internal Revenue Code, debt relief is considered "relief of indebtedness income" and subject to taxation.

In 2007, The Mortgage Forgiveness Debt Relief Act of 2007 (the "Act") was enacted, which generally allows taxpayers to exclude up to $2 million (jointly) or $1 million (if single or married and filing separately) of income from the discharge of debt on their principal residence. Both debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a foreclosure qualify for the relief.

The Act applied to debt forgiven in calendar years 2007 through 2012, and was due to expire on Dec. 31, 2012. As part of the negotiations to avoid the "fiscal cliff," Congress extended its provisions to debt forgiven in 2013.

The Act doesn't apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition. The Act also doesn't apply to credit card debt or non–residential property. A Chapter 7 bankruptcy filing can discharge debt owed to taxing authorities due to relief of indebtedness income.

For strategies on dealing with distressed real estate or avoiding the potential pitfalls associated with relief of indebtedness income, please contact Jim Shenwick.