Few events are more frustrating to a landlord than tenants and bankruptcy. The uncertainty of whether the tenant will pay outstanding rent, compensate for utilities and late fees, and leave the property can be infuriating.
Originally acquired as a source of revenue generation, the property now serves as free housing for a delinquent tenant. Despite the seemingly helpless outcome of a bankruptcy filing, a landlord should know there are still options on regaining possession of his property, as well as receiving some payments, even when a tenant declares bankruptcy.
What Happens When a Tenant Declares Bankruptcy?
The bankruptcy begins when the tenant files a Petition in the Bankruptcy Court. Upon the filing of a Petition, any legal proceeding between the landlord and tenant immediately freezes. This abrupt halting of the landlord-tenant dispute, known as the automatic stay, remains in place until either the bankruptcy court permits for it to resume or the bankruptcy proceeding completes.
Even if the landlord has already won a lawsuit, obtained a judgment for possession to reclaim his property, and has coordinated with a local constable to evict a tenant, the automatic stay proibits any further action. The tenant gets to stay until one of the two conditions above occurs.
While the automatic stay remains in place, the landlord should consider his options in conjunction with a real estate attorney. The petition will specify what type, or Chapter, of bankruptcy the tenant has filed. A landlord’s options depend on the type of bankruptcy the tenant has filed. In nearly all cases, a residential tenant will file in either Chapter 7 or Chapter 13 bankruptcy.
Tenants and Bankruptcy: Chapter 7
In Chapter 7 bankruptcy, the tenant surrenders his assets to a trustee. The trustee determines which of the tenant’s creditors gets paid from those tenant’s assets. The trustee generally liquidates the assets and ascertains the compensation each creditor receives.
The trustee pays creditors with secured claims with proceeds from collateral and then pays unsecured claims. As obligations to the landlord under a lease are usually unsecured, landlords typically fail to receive any payment of outstanding rent, late fees, or utilities when a tenant enters Chapter 7 bankruptcy.
The landlord may still get paid, however, if the tenant assumes the lease in bankruptcy. Under the Bankruptcy Code, the tenant must, within 60 days of filing his petition in Chapter 7, indicate whether he intends to either assume or reject the lease.
If the tenant agrees to the lease, he must maintain current rent payments and provide adequate assurance that he will pay all outstanding monies to the landlord within a reasonable amount of time. The tenant, in turn, can stay in the property while he pays the landlord under the terms of the lease.
Should the tenant fail to make such payments or provide the needed assurances, the landlord may file a motion with the Bankruptcy Court for relief from the automatic stay. A real estate lawyer can help you determine when, and if, to file a motion.
If the Bankruptcy Court grants the motion, the automatic stay terminates, and the landlord may return to state court to remove the tenant from the property.
If the tenant rejects the lease, he is no longer obligated to perform under its terms, such as paying rent. The landlord may try to obtain relief of the automatic stay from the Bankruptcy Court if the tenant refuses to vacate the property. After filing the petition, the Bankruptcy Code provides that the tenant rejects the lease if he does not assume it within 60 days.
Tenants and Bankruptcy: Chapter 13
With a Chapter 13 Bankruptcy, the tenant-debtor attempts to restructure his debt and pay his creditors based on a payment plan. This payment plan, which the Bankruptcy Court must approve (or confirm), should include the tenant’s proposal on paying the landlord any outstanding rent and costs.
Unsecured creditors, like a landlord, may even receive payment. Unlike a Chapter 7 case, the debtor maintains control over his assets instead of having the trustee liquidate them.
In Chapter 13, the tenant has until the time the Bankruptcy Court judge confirms the payment plan, rather than the 60-day deadline in a Chapter 7 proceeding, to either assume or reject the lease. If the tenant drags his feet and fails to meet his lease obligations while the plan confirmation remains pending, the landlord may ask the Court to confirm the plan sooner or seek relief from the automatic stay.
A tenant may propose to pay the landlord only a fraction of the agreed-upon rent spread over a series of several months while maintaining possession of the property. The landlord, however, may seek relief from the automatic stay to re-obtain the property and seek monetary damages in state court. In the event you would like to seek relief, it’s best to consult with a real estate attorney near you.
Tenants and Bankruptcy: Chapter 11
While individual tenants typically enter bankruptcy under Chapter 7 and 13, some may file under Chapter 11. Typically, business entities file under Chapter 11. In Chapter 11, the tenant-debtor will file a restructuring plan and follow the same deadlines to assume or reject the lease as in a Chapter 13 case.
Like Chapters 7 and 13, the tenant’s failure to comply with a lease (such as timely paying rent) provides the landlord a basis to seek relief from the automatic stay. Commercial property tenants filing under Chapter 11 have different deadlines to file a plan of reorganization. They also have separate timelines for assuming or rejecting the lease.