Bankruptcy is a complex legal process.
Knowing what to do if your tenant files for bankruptcy can mean the difference between:
- A profitable rental property
- ... and a painful loss.
If your tenant files for bankruptcy, make sure to secure legal counsel as soon as possible as one wrong step can mean missing out on the chance to collect money that is owed to you.
2 Types of Bankruptcy Code
There are 2 types of bankruptcy that residential landlords typically run across.
- Chapter 7, and
- Chapter 13
Each bankruptcy code is somewhat different, so it's important to understand how they differ.
There is more to the bankruptcy code than just these general details, but this is a good starting place to understand how each is different.
Here's a quick breakdown of each bankruptcy code:
Chapter 7 bankruptcy
When a tenant files for Chapter 7 it is known as a liquidation bankruptcy.
This means that their assets are being sold to pay back their debts.
Chapter 13 bankruptcy
A Chapter 13 filing is also known as a “wage earners plan.”
This type of bankruptcy restructures the debt to be paid off through an approved payment schedule.
Getting payment after Bankruptcy
Once a tenant has filed for bankruptcy, they may still be living in your property.
If that's the case, you're still entitled to rent accrued after the filing. Rent is considered an “administrative expense” and deemed necessary for the preservation of the estate.
If your tenant assumes the lease and is not making efforts to vacate then they should also pay rent as normal.
It's also important to note that you may be entitled to rent that was due before the bankruptcy was filed, but you'll need to file a claim with the bankruptcy court to ensure payment.
How to Avoid Losing Rent During a Tenant Bankruptcy
Now that we've covered key details about the bankruptcy process, let's talk about how to avoid losing rent as a result of a tenant's bankruptcy.
Here are some tips:
1. Learn where the tenant is at in the bankruptcy process (timing is everything)
Timing is incredibly important when a tenant files for bankruptcy.
How much rent you can expect can be determined by when your tenant files for bankruptcy.
Timing may also determine if you can serve a “notice to vacate” or if you need to file for an eviction.
2. Stay on top of collections and late notices
The best way to avoid losing rent is to stay on top of collections and late notices.
If you have a consistent policy for rent collection you are much less likely to lose rent during bankruptcy proceedings.
Part of the danger here is making special payment arrangements with your tenant.
If you accept partial payment before the petition for bankruptcy is filed you may lose the right to collect the remainder of back payments.
3. Keep in mind that bankruptcy will stop the eviction process
Another problem to be mindful of is that bankruptcy will halt eviction proceedings.
If your tenant files for bankruptcy before you serve them a notice of eviction, then they can file for bankruptcy protection.
Once a bankruptcy is filed, an automatic stay is in place.
An automatic stay will keep you from being able to evict the tenant so long as it remains in place.
Lifting an automatic stay requires “a motion for relief from automatic stay” to be filed in federal bankruptcy court.
This process can take anywhere from a few days up to 6 weeks depending on the judge.
If, however, you filed an “Order of Eviction” before the tenant filed for bankruptcy, then the bankruptcy will not halt the eviction process.
How to handle eviction during Bankruptcy
One option that can occur during bankruptcy is the tenant may voluntarily choose to terminate the lease contract.
Termination of the tenant's lease allows you to post a “notice to vacate,” and the tenant will have a number of days to leave the property.
Filing an eviction before your tenant files for bankruptcy is the safest way to ensure you get your property back in a timely manner.
No matter what the circumstances of your tenants' bankruptcy you will be responsible for maintaining the well-being of your property.
Power, water, and heat will all need to stay connected.
Just because your tenant owes you rent doesn't mean you can let their shelter fall into disrepair.
Remember that your tenant is going through a stressful time. Neglecting their home will not help their situation.
Don't go it alone
Always check in with an attorney before making decisions during these kinds of issues.
Professional legal counsel will make sure you're able to follow all the federal and state regulations to ensure you're making the best decisions during a tenant's bankruptcy.
The last thing you want is to make a misstep and end up in legal trouble yourself or miss out on rent or other fees due to you.
To learn more about the landlord-tenant laws in your state, as well as other great resources, check out our comprehensive resource pages:
- Real Estate Rental Laws in the US
- Real Estate Rental Form Templates
- Other property Management Resources