Bankruptcy: What Happens When a Tenant Files

A review of common questions asked about what happens from the landlord point of view when a tenant files bankruptcy.
From MoKsLaw.com.

Bankruptcy is a federal court procedure to help a person(s) get rid of debt in Chapter 7 and repay their creditors in Chapter 13.  There are quite a few questions that landlords have about what happens when a tenant files.

All creditors will receive a Notice of Bankruptcy Filing in the mail to the address provided by the tenants.  There is also a federal website where bankruptcy information may be looked up at www.pacer.gov.

Once a tenant has filed bankruptcy, any action by the Landlord to collect a debt or evict a tenant must stop immediately.  This is called an automatic stay goes into effect as soon as a tenant files for bankruptcy.  Any attempt by the landlord such as writing a demand letter or even having a conversation about a past due balance can be a violation of the automatic stay.  If a landlord violates an automatic stay, the Judge may impose fines or award a teannt a judgment for attorney’s fees, damages and costs.  It could even include damages for emotional distress and lost wages due to time spent solving a violation.

In order to begin  or continue an eviction lawsuit against a tenant who has filed bankruptcy, a landlord must ask the Federal Bankruptcy Judge to remove the automatic stay.  This request is a Motion for Relief from the Automatic Stay.

If a landlord has obtained an eviction judgment, but the tenant files Bankruptcy before the Sheriff removes them, the landlord should be able to proceed.  The “judgment exception” allows a landlord to continue eviction proceedings post-petition, so long as the judgment for possession was obtained beflore the tenant filed bankruptcy.  However, despite this exception, some sheriffs will not permit the landlord to remove the tenant’s personal posessions from the rental property.  It is the best practice to still file a Motion for Relief to avoid potential liability.

The  United  States  Code  provides  a  strict  timeline  that  Courts  must  follow  when  ruling  on  Motions  for Relief.  The stay automatically lifts thirty  days after the  Motion for Relief is filed, unless the Court, after notice and a preliminary hearing, orders that the stay be continued pending a trial to take place within thirty  days  after  that  preliminary  hearing,  unless  the  parties  agree  otherwise,  or  the  Court  finds “compelling  circumstances”  to  justify  keeping  the  automatic  stay  in  place  longer.   An  Order  for  Relief becomes final after fourteen days after it has been granted.

If your rental property is owned in the name of a business entity, you are required by law to be represented by  a  lawyer.   If  you  own  your  rental  property  in  your  individual  name,  you  may  be  able  to  represent yourself without a lawyer.  Title 11 of the United States Code contains highly detailed laws and rules.  In addition,  because  a  person’s  home  is  at  stake,  many  Judges  will  set  the  bar  very  high  when  it  comes  to ruling in the Landlord’s favor.

Rent,  late  fees,  utility  charges,  and  court  costs accrued  during  the  period  of  time  before  a  tenant  files bankruptcy is a pre-petition debt and considered an “unsecured” claim.  This is the last type of claim to be paid and, if paid at all, is almost certain to be severely discounted.

If  a  tenant  stays  in  the  rental  property  after  the  bankruptcy  is  filed,  the  claim  for  rent,  late  fees, utility charges, and court costs for this period of time are post-petition debts.  Post-petition claims are paid before other claims in bankruptcy.

You are obligated to accept payments of the post-petition rent, late fees and costs.

An Order for Relief becomes final after fourteen  days. Thereafter, a landlord can enforce all of  its  state  law  rights  and  remedies  including:  sending  a  demand,  commencing  an  eviction  action, continuing  an unfinished  eviction  action,  or  attempting  to  collect  post-petition  rent,  late  fees,  utility charges, and court costs.

A  “proof  of  claim”  is  a  bankruptcy  form  that  a  creditor  (a  person  who  is  owed  money  in  a  bankruptcy case) files in a bankruptcy case that describes the amount of money the debtor owes the creditor and why.  A  creditor  must  attach  copies  of  documents  supporting  his  claim.   This  may  include  promissory  notes, lease agreement, payment ledger, cashed checks, etc.

In  Chapter  7  cases,  creditors  are  only  permitted  to  file  proofs  of  claim  if  the  Assistant  United  States Trustee discovers non-exempt assets that may be liquidated. In this case, the Trustee will send out a notice to the landlord instructing him to file proofs of claim and the deadline.  This is extremely rare in Chapter 7 cases.

landlords  may  always  file  proofs  of  claim  in  Chapter  13  cases.  The  deadline  to  file  proofs  of  claim  in Chapter  13  cases  is  located  on  the  Notice  of  Chapter  13  Filing  which  is  sent  out  to  all  creditors  when  a debtor opens a case.

An  attorney  may  file  a  proof  of  claim  electronically  via  the  CM/ECF  system.   Creditors  who  are  not represented by an attorney must file the proof of claim in paper at the Federal District Courthouse.

In Chapter 7 cases, the Assistant United States Trustee will use the proofs of claim to make distributions to
creditors based on the amount of money that is recovered from the debtor’s estate.

In Chapter 13 cases, the Assistant United States Trustee may use the information in the proofs of claim to
object to the tenant’s repayment plan. The Creditor/Landlord will also be afforded the opportunity to
object to the repayment plan.

PLEASE NOTE that filing a proof of claim does not guarantee that you will be paid all, or even part, of the money that is owed to you by the tenant.

Learn more about dealing with tenants and creditors who file bankruptcy by viewing the reports on the forms page at www.MOKSLaw.com or by reaching out to Julie Anderson and her team with Anderson and Associates.

Julie isthe Guest Host of the Kansas City Landlord Expo on March 11th and the guest speaker at MAREI on March 14th when she will be fielding eviciton questions.