A tenant filing for bankruptcy is one of the last things a landlord wants to happen. Unfortunately, with the uncertainty in the economy in recent times, the likelihood of this happening has increased. That can mean a struggle to claim unpaid rent- and it throws future rent payments into question.
The question is, what can landlords do if a tenant files bankruptcy, and what is the process that follows? Here, we discuss the ins and outs of Chapter 7 bankruptcy, what it means for you as a landlord, your legal standing, and some of the steps you can take before and after it happens.
What Is Chapter 7?
Chapter 7 is a bankruptcy filing- also known as liquidation bankruptcy or straight bankruptcy. It is an option for people who need debt relief after short-term financial setbacks. There are benefits to filing Chapter 7 bankruptcy- such as the fast clearing of unsecured debt, including medical bills, credit card debt, and personal loans- but the process can be long and embarrassing in some opinions- and it stays on a person's financial record and credit report for up to a decade.
How Does it Differ from Chapter 13 Bankruptcy?
Chapter 13 bankruptcy involves a long-term repayment plan to catch up on secured debts that are out of hand while getting rid of unsecured debt, but Chapter 7 only focuses on wiping unsecured debt and pays back based on what the filer can afford at the time through their assets.
What Happens When Someone Files for Chapter 7 Bankruptcy?
According to bankruptcy law, when a tenant files for bankruptcy, a trustee is placed in charge of all the filer's non-exempt assets, which are then used to pay back creditors- including landlords. There is no guarantee you will get the money you are owed, but you can do things to improve your chances.
The bankruptcy process for Chapter 7 takes a few months (between four and six in most cases). First, the assets are collected and brought to a judge's attention- who then rules on the division of those assets to repay money owed.
One of the first things that happen when someone files for Chapter 7 with the bankruptcy court is an automatic stay- the immediate requirement for a cease of any attempt to collect debts from the filer.
How Does an Automatic Stay Affect You as the Landlord?
An automatic stay does not necessarily mean you cannot continue collecting rent- but it does mean you can't pursue money the tenant owes you. Decisions they make going forward will impact what happens regarding their rent payments.
What Should Landlords Do when their Tenant Files for Bankruptcy?
How does this impact you as a landlord? If your tenant files Chapter 7, it is important to stay calm and gather as much information as possible. Remember, you can't change the fact that it has happened- you can only go with the process and do your part to make things go as smoothly for you as possible.
Find Out if the Tenant Wants to Assume or Reject the Lease Agreement
When a person filing for bankruptcy lives in a rental property, they must decide whether to assume or reject their lease. If the tenant assumes the lease, they must come up with any owed rent quickly and be able to prove their ability to continue paying rent. Alternatively, if the tenant rejects the lease agreement, it becomes part of their assets for the repayment plan, and they should leave the property.
A lease rejection is considered a voluntary termination of the contract, so they are no longer bound by the terms- nor do they have to pay rent.
The tenant has 60 days to decide whether to assume or reject the lease and 30 days to come up with all rent owed if they decide to assume.
Can I Evict a Tenant After They File for Bankruptcy?
You cannot evict a tenant who has filed for bankruptcy- due to the automatic stay. However, you can file a motion to have the automatic stay lifted (which is likely to be accepted if the court sees any example of bankruptcy abuse). When the motion passes, you can then begin eviction proceedings.
If the landlord filed the eviction proceedings before the tenant filed Chapter 7, the eviction can continue.
What If They Fail to Pay Rent?
Chapter 7 relieves existing debt, but it doesn't cover new debt. If the tenant stays on your property and does not pay rent, that money is still owed to you. Failure to pay rent after assuming the lease gives you a case to have the stay lifted.
Create a Claim for Debt Owed
The next thing you need to do is put together a claim for any rent owed to you- including unpaid utility bills. You need to file the claim with the bankruptcy court if you want to be considered for repayment.
Make sure your claim includes:
- Past due rent
- Costs for unpaid bills
- Expenses incurred for the bankruptcy process
- Damages (up to one year of lost rent)
It is worth consulting a bankruptcy professional for advice on how to claim back as much as possible- and to give you the best chance of getting what you are owed.
Wait for a Judge to Decide What Happens with the Assets at Bankruptcy Court
The tenant's assets will be collected and cataloged, then handed over to the bankruptcy court for a judge to decide if the Chapter 7 can continue and- if so- how to fairly repay those to who the tenant owes money to- including you.
Once a decision is made, you will be informed of how and when you should be repaid- and how long to expect the tenant to remain on your property. It may be a repayment plan, in which case you will have to wait- or in some cases, the judge will not require the tenant to pay you back at all. You can challenge the decision if you think it is unfair, but be prepared for the possibility that you will not win.
Moves to Make Pre-Bankruptcy
If you suspect the possibility your tenant may file for bankruptcy, try to do what you can to avoid it or remove yourself from the situation before it happens. This is not always easy- since many people are secretive about their intent to file Chapter 7.
On the off chance you do have some warning, here are some moves to make.
Discuss Possible Compromises
Speak to your tenant about the situation and see if there is something you can do to make things a little easier. Discuss a plan that helps them pay rent- perhaps even reduce the rent slightly for a short time if it is something you feel comfortable with. Maybe you have a less expensive property they can move into?
Try to Find an Amicable Way to Terminate the Lease
Early lease termination is complex, but it could be in your best interests- and the best interests of your tenant. Approach the conversation amicably and considerately to avoid escalating a situation.
Report Questionable Bankruptcy History
Bankruptcy filing damages credit scores, but people do it anyway for a quick fix for debts they can't repay. Unfortunately, bankruptcy abuse is quite common, but there are some tell-tale signs. If you happen to know about a past filing that could throw the legitimacy into question, report it- but be careful if you are unsure of the situation.
Screen Your Tenants Carefully
The best way to avoid facing tenant bankruptcy is to carefully screen people before agreeing to rent them a property. You can see a person's financial history, and it is within your rights to ask for certain financial criteria for your tenants. Focus on finding quality tenants with reliable financial history to reduce your chances of facing this difficult situation.
Tenant bankruptcy is something no landlord wants to deal with, but it happens sometimes.
To sum things up, when a tenant files for bankruptcy Chapter 7:
- They can decide whether to stay or leave- but if they stay, they must continue paying rent and cover any back rent owed.
- It is forbidden to pursue debts from a tenant who has filed Chapter 7.
- You must file a claim for all money owed to you if you want a chance at recovering it- but there is no guarantee you will get it.
- If you start the eviction process before your tenant files, it can continue- but you cannot evict them once the automatic stay has been approved.
- A pre-bankruptcy resolution is preferable- but not always possible.
Familiarise yourself with landlord/tenant laws in your state, and make sure you have all the legal forms you need ready if you suspect the worst.