Declaring bankruptcy means someone is unable to repay their debts and obligations – including monthly rent. Discovering that your tenant has filed for bankruptcy is stressful, and you’re probably wondering what to do next. This guide will help you understand the impact this complex situation can have on your rental income, including what happens if your tenant files for bankruptcy during an eviction.
Secured Claims vs Unsecured Claims vs Administrative Claims
Rocket Lawyer defines the three general types of claims in bankruptcy as follows:
- “Secured claims are for debts backed by specific assets. For example, a car loan is secured by the car. Secured claims generally have the highest priority in a bankruptcy, with the secured creditor having the right to use the asset to pay off the debt.
- Unsecured claims are for debts that are not secured by an asset, such as credit card debt. This is generally any other type of debt that happened before the bankruptcy.
- Administrative claims are claims for new debts the debtor incurred after filing for bankruptcy.”
Their article notes that administrative claims are usually paid before unsecured claims. This order of operations is important to know since the tenant might not have the funds to pay all of their claims in full. Administrative claims are paid first because “bankruptcy law doesn’t give debtors the benefit of taking on and discharging new debts after they already started the bankruptcy process.”
Did You Know?: Most people filing bankruptcy file Chapter 7, allowing them to fulfill unsecured debts by selling off assets, investments, etc.
As a landlord, you might have both unsecured and administrative claims against your tenant:
- Unsecured claim example: Past-due rent and any other charges incurred before the tenant filed for bankruptcy
- Administrative claim example: Unpaid rent incurred after the tenant filed for bankruptcy
If your tenant owes past-due rent, present clear documentation outlining the debt (including how much they owe, when payments were due, partial/full payments made if applicable) to the bankruptcy court. Now, unfortunately, the waiting game begins.
Can I Evict My Tenant for Filing Bankruptcy?
Likely not. When your tenant files for bankruptcy, you and their other creditors are usually barred from collection activity outside of bankruptcy court. Being barred from taking action is called a “stay” in legal terms. Once someone files for bankruptcy, the court enacts an automatic stay so that they can investigate the debtor’s assets and obligations.
Rocket Lawyer states that “landlords may not terminate a lease or evict a tenant without going through the bankruptcy court. Landlords should also consult with an attorney before sending additional late payment notices or taking other collection actions” – and we fully agree.
Plus, your tenant may opt to leave your lease early. Chapter 7 filers who rent have to either assume or reject their lease. They’ll have up to 60 days typically to decide whether to assume the lease (prove their ability to stay and pay monthly rent) or reject it (allow the lease to become part of the assets that are liquidated).
Your lawyer may recommend that you petition the court for relief from the stay if your tenant is damaging the property or if they don’t pay rent due after assuming the lease.
Beyond federal bankruptcy law protections, your state and local laws may shield tenants further. You and your tenant can mutually agree to cancel the lease if both parties think it’s in their best interest, but be careful: you cannot force or pressure a tenant to cancel a lease without violating their bankruptcy rights.
If Your Tenant Declares Bankruptcy During Eviction Proceedings
Your tenant filing for bankruptcy doesn’t give you the right to evict them, but what if you had already served an eviction notice?
Landlord Attorney Ernie Garcia highly recommends seeking out a bankruptcy attorney – specifically a creditor’s attorney, if possible:
The creditor’s attorney can tell you whether or not you have a case and how long you can expect to wait. Your landlord attorney won’t necessarily have the depth of knowledge you need for this type of case, so pursuing a specialist will pay off, if only by level-setting your expectations. On average, a Chapter 7 bankruptcy case takes approximately four to six months from the date the case was filed to its close, according to Shepley Law firm.
While we hope this isn’t the case, you may not be paid back for the rent that you’re owed, unless the court orders the tenant to pay you via a repayment plan. Rather than dwell on what you lost, let’s focus on how to bankruptcy-proof your rental property management business.
Did You Know?: Both renters and landlords ask, “do bankruptcies clear evictions?” The answer is no. Even if your tenant files for bankruptcy during the process, a successful eviction will still show up on their record.
How to Bankruptcy-Proof Your Rentals
The best way to defend yourself against bankruptcy is to follow three key steps:
- Keep a minimum of three to six months’ worth of business expenses (mortgage payments, utilities, landlord insurance, etc.) in savings at all times.
- Foster healthy landlord-tenant relationships. If your tenant feels comfortable enough to give you a heads-up that they’re going to file for bankruptcy, you’ll have an opportunity to negotiate and strategize to limit the impact on you.
- Review tenant screening reports carefully, keeping an eye out for a history of evictions or bankruptcy filings.
Though your tenant declaring bankruptcy is stressful, it’s possible to set yourself up to feel as little impact as possible. To further streamline your rental property management, create your free TurboTenant account today!
TurboTenant, Inc does not provide legal advice. This material has been prepared for informational purposes only and TurboTenant assumes no responsibility or liability for any errors or omissions in the content of this material. All users are advised to check all applicable local, state, and federal laws and consult legal counsel should questions arise.
