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What should you do if your tenant files for bankruptcy?

What should you do if your tenant files for bankruptcy?

One of the worst things that can happen is when your tenant stops paying rent, especially if they file for bankruptcy, but what should you do if they do file for bankruptcy? Can you still follow the normal eviction process?

Tenant Bankruptcy: What Landlords Need to Know

First things first: landlords need to understand which type of bankruptcy the tenant has filed for. There are 4 types of bankruptcy under federal law, but most people will pursue either Chapter 7 or Chapter 13.

  • Chapter 7 bankruptcy, sometimes referred to as “Straight Bankruptcy,” allows people who have a lot of unsecured debt (e.g. credit card debt, medical bills, personal or payday loans, utility bills) to dismiss that debt through a Chapter 7 discharge.
  • Chapter 13 bankruptcy, known as “Reorganization,” allows a person to reorganize their debt and make payments to creditors, usually over a 3-5 year period. Chapter 13 is most commonly used by people who have faced short-term financial setbacks, such as job loss, illness, or large unexpected expenses (e.g. medical bills).

After a person files for Chapter 7 or Chapter 13 bankruptcy, the court will typically grant an “automatic stay”: a statutory injunction that prohibits further actions by creditors, landlords, and others seeking to obtain possession or control of the tenant’s property, or to assert claims against the tenant. This means that after a tenant files for bankruptcy, the landlord is automatically “stayed” from bringing action against the tenant.

If the tenant stays in possession of the leased premises after filing for bankruptcy, they are required to pay post-petition rent to the landlord, keeping those rent payments current as long as they stay in the unit. Some courts prorate the monthly rent. For instance, a tenant who files for bankruptcy mid-month will only be obligated to pay rent for the rest of that month (not the full month, if rent was due earlier in the month). Other courts hold that rent due on the first day of the month is for the entire month. If the tenant files for bankruptcy on the 15th day of the month, the rent for the entire month, including the remainder of the month after the tenant files, is considered pre-petition rent.

Almost all bankruptcy courts consider pre-petition rent to be unsecured debt, which is paid with other unsecured claims—but only after secured and priority claims are repaid.

So the good news for landlords is that tenants who file for bankruptcy don’t get to just stop paying their rent; but any rent that was past due will take some time to collect. – Learn more here!

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