Real estate investing can be a path to financial freedom and passive income for many people. After all, there is always demand for housing. However, as with any investments, real estate purchases are largely speculative, which means that circumstances can change in ways you didn’t foresee at the time of the purchase.
Real estate investors often attempt to maximize their potential income by committing as much of their liquid capital and credit toward the purchase of properties as possible. While that may maximize the amount of rent someone can collect and the amount of equity they build, it also drastically increases their financial obligations and liabilities every month.
The more properties that you have to pay mortgage, taxes and insurance on, the greater the overall income you need to meet your monthly baseline expenses. Real estate investors who find themselves struggling financially and unable to pay all of the bills on their properties may need to consider restructuring their business through bankruptcy.
Bankruptcy lets you renegotiate secured debt
Bankruptcy allows an individual or a business to halt collection activity and potentially discharge certain, unsecured debts. That discharge means they no longer have an obligation to repay the debts in question.
However, you cannot discharge secured debt without surrendering the collateral that secures it. In the case of the mortgages on your investment properties, the undeveloped land or rental property is the collateral that you would lose.
Instead of getting rid of these debts and the properties that secure them, you may be able to negotiate better terms, including a longer repayment period, lower monthly payments, a lower interest rate or more favorable terms regarding repossession or foreclosure if you miss future payments. Those new terms could make it easier for you to retain your properties and rebuild financially after your discharge.
Bankruptcy frees up income for your more important debts
When you file for bankruptcy and receive a discharge or enter into a repayment plan as part of a restructuring effort, you reduce your monthly expenses related to debt and potentially make it easier to fulfill your financial obligations.
Looking at your exact situation, including the structure of your business, the number of properties you hold, the reason for your current financial hardship and the equity in your various properties could help you determine what the best way forward will be.