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When a Tenant Files for Bankruptcy, The Best Defense is a Good Offense

Posted by Eric Sigler on Mar 15, 2016 12:00:00 PM
Eric Sigler
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If tenant has failed to pay their rent, you might find yourself in court to pursue an eviction.  That’s bad enough. Then your tenant tells the court they have filed for bankruptcy.  Upon confirmation of the filing, the court will immediately stay eviction proceedings for an indeterminate period of time. Now you’re left with a delinquent tenant paying no further rent and no recourse to make him either pay or leave.  What should you do?

A landlord’s proper response to this situation starts long before the tenant fails to pay rent.  In other words, swift action requires preparation. Here are some tips:

  • Make sure your lease lists bankruptcy as an event of default.
    This is standard language in a typical lease, but smaller operations often use simpler contracts that don’t include bankruptcy language. While failing to pay rent is an event of default in and of itself, it’s one that can be cured through payment.  Listing bankruptcy as an event of default ensures the tenant knows when they sign the lease that bankruptcy means automatic termination of the lease. This protects the landlord and provides the necessary leverage to terminate the lease regardless of whether the rent has been paid.
  • Understand the Mechanics of an Automatic Stay in Bankruptcy.
    When a person files for bankruptcy, all collections and court proceedings for any debt (with a few exceptions) must cease until the case is dismissed, discharged or removed from the bankruptcy estate. The bankruptcy estate contains all the debts and obligations from which the tenant requests to receive financial relief.  It will likely include any unpaid rent owed to their landlord.  However, there are limitations to the automatic stay.  If a tenant has filed a bankruptcy petition within the last year and it was subsequently dismissed, the automatic stay terminates after 30 days should they file again within the next year. Within the bankruptcy code are protections against abuse and intentional thwarting of legitimate collection efforts. Speak to an attorney if you have any questions.
  • Consider removing the tenancy out of the bankruptcy estate.
    A creditor could get relief by filing a motion in the bankruptcy court to lift the stay. In effect, this would nullify the stay of court proceedings, allowing the eviction to continue. However, landlords should weigh their options. To do this, consider the type of bankruptcy the tenant has filed, which can be determined by reading the tenant’s bankruptcy petition. If the tenant has filed Chapter 7, in which the tenant’s assets are liquidated, the time to discharge is minimal at about 90 days. However, if the tenant files a Chapter 13 bankruptcy, a payment plan and much lengthier process will be involved. A debtor is not discharged until the payment plan is completed, so depending on a tenant’s individual situation, landlords might not receive full payment for years. To further complicate the issue, accurately estimating when a discharge will be received is difficult because the process is often fraught with delays. The tenant may move from the property before they receive a discharge, so that likelihood should be considered as a landlord decides whether to request a stay or wait for a discharge.

Landlords who are the most successful in navigating situations when tenants file bankruptcy are those that are prepare and are not caught unawares by this common tactic.  If you’re successful in getting the stay lifted, submit to the court the order lifting the stay or proof of discharge and request your eviction be reopened.

ClickNotices can help landlords control delinquencies, reduce legal spend, and automate operations. For a demonstration of how our cloud-hosted system can offload the administrative burden of managing late rent, contact us for a demo today.

Topics: Delinquent Rent Management