One of the risks of being a landlord is having tenants who don’t pay their rent.
But, when a tenant files for bankruptcy it creates a different set of issues.
Bankruptcy can disrupt everything from collection efforts to the ability to evict a delinquent tenant.
However, it is possible for a landlord-tenant relationship to survive a bankruptcy.
Once you understand your rights and responsibilities as a landlord, you will be able better protect your investment and minimize your loses from a tenant bankruptcy.
Landlord Rights and Responsibilities in Tenant Bankruptcy
The moment a tenant files for bankruptcy, the bankruptcy court issues a ruling called the automatic stay. The automatic stay freezes any efforts by creditors to collect any money due. You or your property management company will get notice of the bankruptcy through a letter from the bankruptcy court.
The bankruptcy court that oversees all of Baltimore County and the surrounding areas is located in the federal courthouse in Baltimore. The federal courthouse in Greenbelt serves counties such as Montgomery and Prince Georges, which are located closer to D.C.
If your tenant is late on his or her rent you cannot send them any requests or reminders about the money you are owed without first getting permission from the bankruptcy court. Failure to obey the automatic stay can result in you being held in contempt of court and fined.
Not all creditors in bankruptcy are treated equally.
The good news is that as a landlord you are given a higher priority over most other creditors. If the tenant is still living on your property you can get what is called relief from the automatic stay. This means the court gives you permission for certain collection activities.
What Happens If You Are in the Middle of an Eviction?
Often tenants will file for bankruptcy in the middle of an eviction proceeding. What your rights are depends on exactly where in the eviction process you are. Filing for bankruptcy freezes eviction proceedings.
But, if prior to the bankruptcy you have already obtained a judgment from the state court and are just waiting for the actual eviction to be carried out, you can ask for relief from the automatic stay to continue the eviction process. The bankruptcy court will usually grant this request.
Most of the time in Maryland, bankruptcy will only delay an eviction. It will not stop it permanently. However, if you have not started the formal eviction process before the bankruptcy filing, it may be more difficult to evict the tenant during the bankruptcy.
Maryland also allows tenants “the right to redemption,” meaning that if they can come up with the cash for the past-due rent and court costs before the eviction takes place, they get to stay in the property. Bankruptcy is sometimes used as a tool by tenants to extend their time to get together funds to redeem the property.
Bankruptcy courts will not typically allow a tenant to stay rent-free in a property where there is already past due rent for very long. But, it is up you to exert your rights as a landlord in bankruptcy court.
Because each case is unique, you should consult with an attorney experienced with landlord rights in bankruptcy before taking any action.
What About Back Rent?
There are many different types of bankruptcy and they each have different consequences for creditors. Residential landlords will most often have tenants that file a Chapter 7 or a Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 is a complete liquidation.
The bankruptcy court will examine the debtor’s assets and debts. Assets that are not exempt will be liquidated and the proceeds will be split amongst the creditors depending on the priority of their claim. Landlords have a higher priority than creditors such as credit card companies.
Most debtors who file Chapter 7 do not have any assets. In this case the creditors usually get nothing and the debt is wiped out.
If your tenant files a Chapter 7 bankruptcy, you will not be getting your back rent and the tenant will soon be out of the property, assuming you follow the proper procedures.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies work differently.
The debtor is allowed to come up with a plan to pay creditors over a period of up to five years. Certain creditors will get nothing or just pennies on the dollar. Landlords under a Chapter 13 usually get all of the back rent if the tenant is planning on staying in the property.
But, bankruptcy judges can eliminate any late fees and even reduce the interest rate on late rent. Your tenant may pay all of his or her back rent, but you may still end up with a financial loss because of these reductions.
What Happens if the Tenant Stays?
When a tenant files for bankruptcy you are required to stop all collection activity, including eviction proceedings, until the court gives you permission to continue. But, that does not mean you cannot plan for your next step.
If the tenant has been a good tenant and has been current on his or her rent, you may want the tenant to continue renting. But, if the tenant is not current, you may want to try and get rid of the tenant as soon as you legally can.
If a tenant is current on the rent at the time of the bankruptcy and continues to remain current, you cannot take any action against them during or after the bankruptcy just because of the bankruptcy. But, if the tenant is delinquent you still have the right to start or continue eviction proceedings once the court gives you permission.
In Chapter 13 bankruptcies where you had not yet started an eviction, you may end up having to keep the tenant, even though they owe back rent. If the tenant is able to make the current rent payments and makes the payments on the past due rent as part of the bankruptcy plan, and they otherwise obey the terms of the lease, you will have to continue to rent to them. But, if the tenant fails to stay current or make the payments on the past due rent, you can exercise your rights to evict the tenant.
Bankruptcy can cause landlords significant headaches and interfere with their ability to evict delinquent tenants and collect rent.
Having an experienced property management team by your side will help you stay in compliance with the law and can minimize the risk of bankruptcy by working quickly to enforce the terms of the lease and evict tenants before significant delinquencies occur.