How to proceed when your self-storage tenant files for bankruptcy
When you come to read this article, I hope the light at the end of the coronavirus tunnel clears, more vaccines are being rolled out, and life begins to return to normal, no matter what. Remember, your self-storage tenants always face challenges, including financial hardship.
At the onset of the pandemic, you may have heard of government orders, including moratoriums on evictions and forbearance from foreclosure. As these measures are lifted, this bagpiper will have to be paid. Many of your clients will face evictions or foreclosure requests for unpaid rent or mortgages, which could easily run into the thousands of dollars. This is in addition to deferred utility bills, credit card payments and other financial obligations that creditors have not been able to collect. As all of these debts fall due, your clients might not be able to pay what they owe, which can cause them to file for bankruptcy.
If you are ever notified that one of your tenants has filed for bankruptcy, you must act appropriately to avoid any legal risk. This article explains what you need to know about filing and what action you need to take.
Respect the classification
The problem with bankruptcy law is that it is counterintuitive. What you think is right and right is sometimes just the opposite. The law is written to protect the debtor, not his creditors. It doesn’t matter if you don’t agree with this concept. A violation of a bankruptcy order can result in contempt of court. You may have to pay damages to the debtor and even be required to pay his attorney’s fees. Contempt of court orders could also include jail time!
It is also important to know that you may be involved in bankruptcy even if the debtor does not owe you money at the time of filing. This happens because you may be listed in the bankruptcy petition for reasons other than being a creditor, for example, by holding a security deposit.
Additionally (and this is important): Just because you don’t receive formal written notice from the tenant or the bankruptcy court, any verbal or implied notice is sufficient. At this point, you should assume that bankruptcy has been filed and act according to the rules. So if a tenant or someone who knows them tells you that they have dropped off or plans to drop off, even though you haven’t received a written notice, the onus is on you. You must determine if this alleged deposit is true before taking action against your tenant or making any collections.
Understanding the automatic stay
The first concept you need to understand about bankruptcy is automatic stay. As soon as a bankruptcy is filed with the court, an automatic stay order is issued without even the judge seeing the filing. This gives the debtor protections under bankruptcy law, which provides that no creditor can take steps to collect a debt after bankruptcy is filed. This is true even if you think it is filed in bad faith.
These actions include the initiation or continuation of any kind of legal process. In self-storage, this would refer to sending invoices, overdue notices, automatic text messages, imposing additional fees, lien notices or making sales or evictions of privileges. As soon as you believe or know that bankruptcy has been filed, you must stop whatever you are doing to collect the debt from that tenant. This means stopping all automatic services like SMS or robocalls, lest you violate the automatic suspension.
Get a social security number
Bankruptcy of the tenant is one of the reasons why it is so important for you to obtain the tenant’s Social Security Number (SSN) at the time of rental. If he ever files for bankruptcy or claims he did, his SSN is the best way for you to confirm it. It allows your lawyer to check the federal government’s court records system.
If a tenant says, “I’m filing for bankruptcy” and you’re a few days away from a lien sale, you can use their SSN to verify that statement and see if you should stop the auction. Without this vital information, your hands are tied and you must stop at His word alone. Many tenants will tell a self-storage operator that they go to file but don’t actually do it. Without the right information, you will be stuck.
Find out the type of deposit
Once you have a word, rumor, opinion, or even a hint of bankruptcy, it’s time to call your lawyer. It will ask you if you know the filed bankruptcy chapter.
Most bankruptcies involving your tenants fall under Chapter 7, which aims to pay off all unsecured debts and even some secured debts. There’s also Chapter 13, sometimes known as an employee plan, where bankruptcy lasts for a period and the debtor pays some or all of the debt through wage garnishment in a plan. If so, you will need to provide proof of claim to court to participate. Chapter 11 is a corporate reorganization, similar to Chapter 13, but more suited to businesses than individuals.
Work on your remedy
One of the most common mistakes self-storage operators make is trying to negotiate some sort of overdue rent refund with the tenant after they file for bankruptcy, with or without a move. This violates the automatic stay order!
Fortunately, you have a cure. You don’t have to wait months or years for bankruptcy to resolve itself. On the contrary, you can negotiate the departure of the tenant. To be on the safe side, your lawyer should oversee these negotiations. If the tenant is unable or unwilling to vacate the premises, your lawyer can file a motion to lift the automatic stay, which the court may grant. This gives you the right to remove the tenant from your storage unit.
Understand, however, that this approach can be extremely complicated, especially with Chapter 11 bankruptcies. It has become even more complicated since the adoption of the Consolidated Appropriations Act (CAA) in December. He seems to have extended the deadline for refusing a lease. So, working with your lawyer is extremely important.
The CAA has also changed the rules for preferential payments, which are those you can receive from your tenant before they go bankrupt. If you are considering taking payments from a defaulting client, talk to your lawyer, especially if you are concerned that the tenant will go bankrupt in the near future. Your legal representative can potentially help you prevent these sums from being recovered under the new bankruptcy code preference guidelines.
Remember, if the tenant doesn’t pay you after you file for bankruptcy, ask your lawyer to negotiate a move. It is your best medicine. Don’t allow a debtor who has filed a complaint to just stay in your space without payment just because you don’t understand your rights under the code.
Bankruptcy is a delicate area of the law. If you have a tenant who has gone bankrupt or might declare bankruptcy, don’t think you can take care of it yourself. Contact your lawyer and let him help you. It might cost you a few dollars, but the representation will be well worth the legal fees in this case.
This column is intended to provide a general legal overview of the self-storage area and should not be used as a substitute for the advice of your own lawyer.
Jeffrey J. Greenberger is a partner in the law firm of Cincinnati Greenberger & Brewer LLP. Licensed to practice in Kentucky and Ohio, his primary focus is on representing owners and operators of commercial real estate, including self-storage. Its website, selfstoragelegal.com, contains legal opinions and ideas as well as an archive of articles. To reach him, dial 513.698.9350; E-mail [email protected].