Tenants and Bankruptcy | High Swartz LLP
Few things are more frustrating for a landlord than tenants and bankruptcy. The uncertainty of whether the tenant will pay the unpaid rent, compensate for utilities and late fees, and vacate the property can be infuriating.
Initially acquired as a source of income, the property now serves as free accommodation for a delinquent tenant. Despite the seemingly helpless outcome of a bankruptcy filing, a landlord should know that there are still options to repossess their property, as well as to receive certain payments, even when a tenant declares bankruptcy.
What happens when a tenant declares bankruptcy?
Bankruptcy begins when the tenant files a petition in bankruptcy court. As soon as a petition is filed, any legal proceedings between the landlord and the tenant are immediately blocked. This abrupt end to the landlord-tenant dispute, known as an automatic stay, remains in place until the bankruptcy court clears its resumption or the bankruptcy proceedings come to an end.
Even though the landlord has already won a lawsuit, obtained a possession judgment to reclaim his property, and coordinated with a local constable to evict a tenant, the automatic stay prohibits any further action. The tenant can stay until one of the two conditions above occurs.
As long as the automatic stay remains in place, the owner should consider their options in conjunction with a real estate lawyer. 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 almost all cases, a residential tenant will file Chapter 7 or Chapter 13 bankruptcy.
Tenants and Bankruptcy: Chapter 7
In Chapter 7 bankruptcy, the tenant assigns his property to a trustee. The trustee determines which of the tenant’s creditors is paid from that tenant’s assets. The trustee usually liquidates the assets and determines the compensation that each creditor receives.
The trustee pays the creditors with secured debts with the proceeds of the collateral and then pays the unsecured debts. Since obligations to the landlord under a lease are usually unsecured, landlords typically receive no payment for unpaid rent, late fees, or utilities when a tenant files for Chapter 7 bankruptcy.
However, the landlord can still be paid if the tenant takes over the lease in bankruptcy. Under the Bankruptcy Code, the tenant must, within 60 days of filing his Chapter 7 petition, indicate whether he intends to assume or refuse the lease.
If the tenant accepts the lease, they must maintain current rent payments and provide adequate assurance that they will pay all outstanding amounts to the landlord within a reasonable time. The tenant, in turn, can stay in the property while they pay the landlord under the terms of the lease.
If the tenant fails to make these payments or provide the necessary insurance, the landlord can file a petition in bankruptcy court for a waiver of the automatic stay. A lawyer specializing in real estate law can help you determine when and if you should file a claim.
If the bankruptcy court grants the petition, the automatic stay ends and the landlord can return to state court to remove the tenant from the property.
If the tenant refuses the lease, he or she is no longer obliged to fulfill its conditions, such as paying rent. The landlord can try to get automatic stay relief 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 tries to restructure his debt and pay his creditors on the basis of a payment plan. This payment plan, which the bankruptcy court must approve (or confirm), should include the tenant’s proposal to pay the landlord any unpaid rent and fees.
Unsecured creditors, such as a homeowner, can even receive payment. Unlike a Chapter 7 case, the debtor retains control of its assets instead of having them liquidated by the trustee.
In Chapter 13, the tenant has until such time as the bankruptcy court judge confirms the payment plan, rather than the 60-day time limit in Chapter 7 proceedings, to assume or reject the lease. If the tenant drags their feet and does not meet their lease obligations while confirmation of the plan is pending, the landlord can ask the court to confirm the plan earlier or request a waiver of the automatic stay.
A tenant may offer to pay the landlord only a fraction of the agreed rent spread over a series of several months while retaining possession of the property. The owner, however, can seek relief from the automatic stay to recover the property and seek damages in state court. If you wish to seek redress, it is best to consult a real estate lawyer near you.
Tenants and Bankruptcy: Chapter 11
While individual tenants typically file for Chapter 7 and 13 bankruptcy, some may file a Chapter 11 claim. Typically, business entities file a Chapter 11 claim. 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, a tenant’s breach of a lease (such as paying rent on time) provides a basis for the landlord to seek a waiver from the automatic stay. Tenants of commercial buildings who file under Chapter 11 have different deadlines for filing a reorganization plan. They also have separate timelines for taking over or rejecting the lease.