Are you a victim of tenant declaring bankruptcy, now what?
One of the major concerns of a landlord is the tenant who fails to pay rent. Most landlords however find a way out with such tenants in some way. But a tenant declaring bankruptcy can be a nasty experience for the landlord. Your peace is gone, pocket is dipped and you may end up destroying your landlord business.
You can save yourself from a tenant declaring bankruptcy by exercising your landlord rights. You need to understand types of bankruptcies and learn options available legally for eviction and collection of the owed money. Never let a bankrupt tenant unsettle your chores and cause you any kind of legal and financial conflicts.
Landlord Remedies while Tenant declaring bankruptcy
The most common cause of tenant declaring bankruptcy is that they are getting behind rent as they have no money. And as a landlord, you will then want to eject such tenant out of your property as soon as possible. Now in this case, you either ask tenant to pay the money owed or you will have to evict them. Having no money and insufficiency to rent another place motivates the tenant to declare the bankruptcy.
Declaring Bankruptcy enables the tenant to seek an automatic stay from the bankruptcy court. This automatic stay prevents the creditors to act in any form in lieu of collecting the owed money. As a landlord; you are now unable to send demand requests or take any action in this regard.
However, the automatic stay can be pulled off by the court on a landlord request. It has become a little easy for landlords to make such requests with court after the introduction of Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. But, it is only valid for certain cases and situations that you will learn a little later in this article.
Your tenant has declared bankruptcy, now what? How are you going to save yourself from setbacks? How will you eject a bankrupt tenant when court has ordered an automatic stay? Will a bankrupt tenant live rent free at your property? Are there any remedies available for landlords stuck in this situation?
A Sigh of Relief
The first thought you get after hearing about tenant bankruptcy is whether the tenant will live in property rent free? After all the court has order an automatic stay and you can`t collect any money from them now. No, this is not the case and the court has only ordered to stop any activity that pursue tenant for paying the owed money.
The bankrupt tenant can`t live on your property rent free. The tenant has to see a way to pay all the future rents to the landlord. Requesting the court to pull of the automatic stay, the court gives the tenant a right to redemption which means to either to go by lease or to reject it. Going by lease means the tenant has to comply by the terms of the lease and has to pay all the rent occurring in future. And the tenant has to move out of the place if opting to reject the lease.
The concern here is not about future rents but about due back rents. You can have hard time collecting the back rent due from a tenant who has declared bankruptcy. After the tenant declaring bankruptcy, the rent due in back date is treated as an unsecured debt. And, in order to procure your back rent, you may need to wait for long until the tenant gets back on track or the court orders to liquidate the tenant`s assets.
Tenant can declare Two Types of Bankruptcies
A tenant can declare any of the two types of bankruptcies according to his situation. A tenant either files a bankruptcy under chapter 7 or under chapter 13. These two types of bankruptcies will have different outcomes for the landlord. So, it becomes important to understand what it is all about these two bankruptcies.
- Declaring Bankruptcy under Chapter 7
The tenant declaring bankruptcy under chapter 7 will have his assets liquefied by the bankruptcy court. These assets are then sold off in lieu of paying to the creditors. Generally the court assigns a trustee who regulates the liquidation process and will determine which creditor to pay first.
The Landlord is a preferred creditor after the secured creditor and is given second highest priority to collect owed rent. The Bankruptcy and Insolvency Act prioritize the landlord for collection of up to 3 months of owed rent by the tenant.
A landlord simply needs to put a claim in the bankruptcy court that the debtor (Tenant) owes the money of creditor (Landlord). You can assert various claims in the court. These can include past due payments before bankruptcy, late payments penalties, pre mature lease rejection charges, and legal fees.
- Declaring Bankruptcy under Chapter 13
A tenant declaring bankruptcy under chapter 13 will allow a repayment plan to pay to the creditors. The bankruptcy court provides a debt relief to the chapter 13 filler and he can repay its creditor back over the course of three to five years.
The bankruptcy court also assigns a trustee in the case of chapter 13. The role of trustee is a bit different in chapter 13 than the chapter 7 bankruptcy. Trustee will look after the feasibility of the proposed repayment plan by the debtor. The repayment plan should comply by the laws. And it should be right enough to pay the creditors all or some money during the period.
The trustee is responsible for collecting the debtor`s payment and distributing the money accordingly among creditors. As a landlord, you will be treated as priority creditor. You need to submit a claim of the money your tenant owes to you in the bankruptcy court. You also have a right to object the repayment plan of the tenant if you see it unworkable.
How about evicting a tenant who is declaring bankruptcy?
A Bankrupt Tenant can have a hard time keeping up with the rent. You want a tenant who can pay the rent timely and not someone who is struggling financially. It is quite possible you also want to evict a tenant who is declaring bankruptcy just like the other landlords. But, it is not always possible that you can evict a tenant who is declaring bankruptcy.
It depends upon various circumstances and the timeline where as a landlord you are standing. Your chances of evicting a bankrupt tenant changes according to an eviction filed before bankruptcy or filed after bankruptcy. So in order to evict bankrupt tenants, you need to understand the law and the general process involved in such cases.
Eviction before tenant declaring Bankruptcy
Jackpot! If you have received an eviction judgement in your favor before your tenant declares bankruptcy. You can certainly evict this tenant legally from your property. The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 allow the landlord to carry the eviction process if you have received the eviction judgement.
If the tenant files bankruptcy after the eviction judgement, he will still get an automatic stay. But, having the eviction court judgement in your favor, this stay can be easily lifted by bankruptcy court on request. However, things can go a little different if tenant declares bankruptcy under chapter 13 instead of chapter 7.
- Eviction under Chapter 7 before tenant declaring bankruptcy
As for the chapter 7, the automatic stay will be lifted instantly. Being the bankrupt tenant has no way presently to pay future rents, the judgement will pass in favor of landlord. You can continue with the eviction process.
- Eviction under Chapter 13 before tenant declaring bankruptcy
In the case of chapter 13, the tenant declaring bankruptcy still has a small chance to hold the automatic stay. The Tenant can file a sworn statement and the judge may want to consider the tenant chances of keeping current with rent payments.
The tenant then needs to prove his chances of future payment and need to deposit 30 day advance rent to the court. If successful, the court will issue a certificate for tenant certifying his ability to pay. The tenant is required to submit one copy of the same certificate to you and will have to any back rent due within 30 days.
The tenant, if paid back rent within 30 days then the court will issue another certificate to him. If you accept these certificates and have no objection on the stay of the bankrupt tenant, eviction will be stopped. But if you reject any of these certificates, then you and your tenant are held at the court. Now the court will decide whether to lift or keep the automatic stay of the tenant.
Eviction after tenant declaring Bankruptcy
Hard Luck, if you are trying to evict a tenant who has declared bankruptcy already. You can`t initiate any eviction on a bankrupt tenant as per the guidelines by law. The existing lease between you and your tenant becomes obsolete and hence is not enforceable. Even if your lease states that a bankruptcy is a breach of contract, you are not able to evict the tenant.
The tenant declared bankruptcy has got an automatic stay from the court. Doing any actions for recovering past due money, offsetting security deposits or pulling eviction are not allowed. And you will face serious repercussions for contempt of court. There is nothing much you can do about eviction in this case. However, still there are some situations where a tenant who has declared bankruptcy can be evicted.
- Illegal Possession or use of Drugs
- Failed to stay current with future payments
- Eviction under Chapter 7 after tenant declared bankruptcy
Eviction under chapter 7 after tenant declared bankruptcy is still possible. The automatic stay is hard to lift but in case of chapter 7 bankrupt tenant, you still have a chance. The bankruptcy court has only wiped the existing debt of bankrupt tenant. The tenant has to anyway pay the future rent if he chooses to stay at your property. You can exercise all your landlord rights on this tenant for future tenancy.
- Eviction under Chapter 13 after tenant declaring bankruptcy
When the tenant declares bankruptcy under chapter 13, they can exercise the right to redemption. The right to redemption allows them a 30 days period to make their decision. After this period, the tenant needs to react on the option before the bankruptcy court.
They can either assume the lease or reject it by leaving the property voluntarily. And if they didn`t come up within 30 days, the lease is automatically rejected. You can then proceed with eviction. But if they assume the lease, you can`t deny them renting on your property. However, the tenant needs to stay current with future rent payments. But a landlord still has some resorts to make up this situation.
Always stay proactive on the action of tenant and if they ever make a default, never hesitate claiming revoke on automatic stay. However, you can also negotiate a pre bankruptcy resolution with the bankrupt tenant to keep your landlord tenant relationship intact. As this will help you avoid any kind of future hassles. And once the bankrupt tenant is back on track, you can exercise your options. You can start the eviction process. But, you can also keep him to stay on your property if he has been a good tenant.
The Bottom Line
Bankruptcies are difficult and can toil you a lot. The successful landlords always advise to stay alert on the condition of the tenant and always have a complete background check. You can also consider having a landlord insurance to save yourself from hassles of financial setbacks. So, always take necessary steps before a tenant makes some damage to your business.