Own Rental Property? What To Do When A Tenant Files For Bankruptcy

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Own Rental Property? What To Do When A Tenant Files For Bankruptcy

During the pandemic, many people fell behind on their rent, and this presented a challenging situation. After all, many landlords still needed to pay bills related to their tenants’ housing, but evictions were put on hold nationally, as the courts closed and moved to remote operations.

As we emerge from the pandemic, however, landlords are waiting on back payments and tenants are in dire financial straits. But what’s a landlord to do if their tenant files for bankruptcy?

Check The Law

Did you write a clause into your lease that says, in the event you tenant files for bankruptcy, the lease is breached and voided, and eviction proceedings will begin? It’s a common tactic, but ultimately a futile and, more importantly, illegal thing to do. Under almost all state laws, a tenant cannot be evicted if they file for bankruptcy. That being said, you may still be able to evict a tenant if the cause of the eviction is not financial, though you could potentially find yourself in housing court fighting over that issue.

Timelines Matter

Both eviction and bankruptcy are legally processes, and that means they can take a fair bit of time to execute, and how they’re executed varies depending on the state. That being said, if you’ve served a tenant with eviction before they file for bankruptcy, your eviction notice is likely to have more teeth than if you tried to evict them afterward. This makes sense since a tenant might file for bankruptcy to escape eviction proceedings if that was a valid legal strategy.

The Lease In Limbo

Once your tenant files for bankruptcy, you’ll find yourself in a new position as a landlord. Specifically, if you tenant files for Chapter 7 bankruptcy, you’re still bound to rent to your tenant until they decide to assume or reject the lease. While there’s no clear timeline on this process, a tenant who is liquidating their assets to eliminate their debts needs to promptly accept their existing lease and agree to pay any back rent or reject it. If the lease is rejected, they will have to leave promptly, and you’ll be paid either via liquidated assets or a payment plan.

Other Pathways

As noted above, when a tenant files for bankruptcy, all collections ­– including collection of back rent or new legal action against the tenant, such as an eviction – is stayed, but stays aren’t as absolute as they may seem at first. Rather, this automatic stay can be lifted by the court, a process which has been made easier since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005.

This modification to the US Bankruptcy Code gives tenants greater recourse to request a stay be lifted so that they can pursue back rent outside of the channels permitted by standard bankruptcy filings. You do, however, have to take the initiative to make this happen and whether or not the court chooses to lift the stay will depend largely on the individual court’s discretion.

Many landlords view themselves as victims of a tenant’s bankruptcy filing, and though there are financial issues at stake, they are typically much less damaging to you in the long-term than they are to your tenant. Indeed, whether your tenant files for Chapter 7 or Chapter 13 bankruptcy, you will most likely receive at least some of the back rent owed. You may not be made “whole,” but given how damaging bankruptcy is for the individual, no one is filing for bankruptcy to escape their back rent. They’re doing the best they can, and the legal system will ensure your tenants do right by you.