BANKRUPTCY AND RESIDENT
 

It is the 5th of the month and you have not received the rent for one of your tenants. You are carefully preparing the Three Day Notice when the mail arrives. An official looking document from the Bankruptcy Court is addressed to you. Upon opening the envelope, you see that it is a “Notice of Commencement of Bankruptcy”, naming your tenant as the debtor. Unfortunately this scenario is becoming quite common, as bankruptcy filings are on the rise, with many of the bankruptcies being filed by renters. Can the tenant live there for free now? Can you evict that tenant? Can you cancel the tenant’s lease?

Once you receive notice from a tenant that he or she has filed for bankruptcy, you are prohibited by federal law to take certain actions. You are not allowed to attempt to collect the rent owed to you or seek possession of the rental premises without first obtaining permission from the bankruptcy court. If you had already served the tenant a Three Day Notice, you cannot file an eviction. If you had already served a Three Day Notice and filed an eviction, the eviction comes to a screeching halt. Even if you already received a Final Judgment of eviction from the County Court Judge and the Sheriff has served the Writ of Possession scheduling a lock out within hours, the lockout will be “stayed.” We have had tenants file bankruptcy minutes after the judge signed a final judgment of eviction in court. The bottom line is that a bankruptcy filing stops all collection and eviction proceedings cold. Any time you give a tenant a break or voluntarily delay finishing up an eviction, you run the risk of the tenant filing bankruptcy. If you violate the bankruptcy laws and attempt to continue collect the debt or regain the rental premises, you could incur serious penalties and sanctions. Is all hope lost?

Immediately upon receiving a written suggestion of bankruptcy, or even if the tenant verbally tells you that he or she has filed for bankruptcy, you should immediately call your attorney, who will check with the Federal Bankruptcy Court to see if a bankruptcy has indeed been filed. If it is verified that a bankruptcy has been filed, your attorney can prepare a motion to “obtain relief from the automatic stay” of bankruptcy. Since the bankruptcy filing “stays” or “stops” everything, you must petition the bankruptcy court to allow the “stay” to be lifted for the purposes of collecting your debt or continuing to pursue your eviction. The procedure of petitioning the bankruptcy court to successfully lift the stay will typically take 30-45 days with regard to a Chapter 7 petition, and 45-60 days with regard to a Chapter 13 petition. If the delinquent tenant in bankruptcy actually attempts to make payments to the landlord within the bankruptcy proceeding, the above timetables will be expanded, but in most cases, payment will not be forthcoming.

The most common bankruptcy filing you will see is what is called a Chapter 7 petition. This is also called a "liquidation” and often occurs when a tenant has mounting credit card debt, car payments, and hospital bills and just cannot get out of the proverbial debt trap. Most of the creditors, including you, will probably never see a dime of money once the bankruptcy is completed, but thankfully, the law has carved out a niche that at least allows you to prevent the tenant from living on the premises until the bankruptcy is completed. A typical Chapter 7 bankruptcy petition takes a few months and sometimes over a year to be completed, but a swift call to your attorney the moment you receive the dreaded Suggestion of Bankruptcy will usually result in about a month’s delay in removal of the tenant, in addition to the normal eviction timetable.

The tenant in bankruptcy can often buy more a little time when a Chapter 13 debt reorganization is filed, or in the rare event you rent to a corporation which subsequently files for Chapter 11 business reorganization protection, you could be looking at bigger delays. If you take no action in bankruptcy court as landlord, horror stories abound, since the tenant can occupy the premises for literally years with you having no legal recourse. Whether a Chapter 7, 11 or 13 petition is filed, if the bankruptcy is eventually followed through to the point of discharge, your collection will be limited to your security deposit retention and/or proof of claim filed with the bankruptcy court. The remainder of the tenant’s debt will be legally wiped out forever.

Suppose an applicant comes to you, and the credit report shows that the applicant is currently in a bankruptcy proceeding. Should you rent to that person? Technically, the lease with your company would constitute a “post-petition” transaction, and the automatic stay should not protect that tenant. However, that tenant could potentially seek to amend the bankruptcy petition to include you. Even if the tenant makes no attempt to amend the bankruptcy petition, if the tenant informs the sheriff of the bankruptcy at the end of the eviction, the sheriff is not likely going to make the legal distinction that your lease transaction is “post-petition”, and you will still often be required to obtain official authorization from the bankruptcy court before completing the eviction.

Be very leery of applicants who have a history of filing bankruptcy, but who do not actually follow through to the point of discharge, (known as serial filers). That pattern suggests an applicant who has no qualms about living rent free for a few months before moving on to another landlord to share the same treatment.

The next time you receive a “Suggestion of Bankruptcy” on behalf of a tenant or see any information regarding bankruptcy on an application to rent, call your attorney and get some advice. Not all attorneys are admitted to practice before the bankruptcy courts in Florida and some have to “farm” the bankruptcy proceedings out to another attorney.