Help, My Tenant Filed for Bankruptcy! (Part 2)
In the first post of this series, you learned more about the bankruptcy process and how it can affect your relationship with a tenant. Filing bankruptcy can be a challenge for you and your tenant, and you owe it to yourself to know what you can expect during the process. The first post covered how to screen tenants to try to avoid bankruptcy situations, and you also learned the difference between Chapter 7 and Chapter 11 bankruptcy. You learned about pre-petition and post-petition claims, and how the rent you're owed figures into the equation.
In the conclusion of this two-part piece, you'll learn about automatic stays, how to terminate a lease if your tenant files for bankruptcy, the tenant's ability to assume or terminate the lease and re-leasing your property.
As before, keep in mind that laws change quickly, and your state or municipality may have laws that aren't reflected in this article. If you have any questions, it's always best to seek a lawyer who can rule on your particular case.
Can I Still Collect Back Rent?
When a tenant files for bankruptcy, the court institutes what's called an automatic stay. This means that most creditors cannot pursue any collection actions against the entity that filed for bankruptcy without the permission of the court. However, be aware that as the entity's landlord, you are not subject to this restriction and may still collect back rent as you normally would. However, remember that because back rent is an unsecured claim, it's considered a low-priority payment and you may never get all of it back.
When the Landlord Terminates the Lease
If you have intimations that your tenant may be considering filing for bankruptcy, you may be interested in removing the tenant before that happens. Keep in mind that you're bound by all normal laws surrounding evicting a tenant, if you plan to do so. What these laws are, exactly, varies from place to place, but generally, if a tenant has failed to pay rent, you may give them notice to quit. The notice to quit, however, is not the same as an eviction. An eviction is typically a long, drawn-out court process that may take many months—and by then your tenant may have successfully filed for bankruptcy.
If you're like many landlords or property managers, you've made sure your lease has a clause stating that filing for bankruptcy breaches the lease. However, most jurisdictions do not permit you to terminate a lease because a tenant has filed bankruptcy, and you also may not put additional requirements on a tenant (such as increased rent or fees, or requiring payment in cash rather than a check) due to their bankruptcy.
When the Tenant Assumes (or Terminates) the Lease
Chapter 7 bankruptcy, in particular, lets the tenant decide whether they wish to assume or terminate the lease. Essentially, this means that they can reconsider the financial obligation of the lease in light of their current situation. If they decide that it's too heavy of a burden in their current state, they may choose to terminate the lease within 60 days without a breach of contract. If they cannot decide during that period of time, they may file a request for an additional 60 days to decide, so long as they give an explanation of their circumstances and the court accepts this. In response to this request, you are within your rights to explain to the court the stresses that this puts on you as the landlord or property manager.
It's distinctly possible that your tenant will decide to assume the lease, so it's not a good idea to assume that they'll terminate it and move out without you collecting any back rent. If the lease is assumed, the tenant is agreeing to pay all outstanding rent within a reasonable time (which may vary by the locality, but is often within 60 days). If the tenant requires additional time to pay, they're going to have to make a motion for that with the court.
If your tenant gives notice of termination, you cannot stop them from terminating the lease. In this scenario, you should start showing the property immediately. You may have already lost money during this period, and the last thing you want is to have your property sitting empty.
Because of how the re-leasing process works and how long it can take to get a new tenant into the property, most landlords try to block any motions from the tenant to extend the 60-day period of assumption or termination of the lease. Three months is a very long period of time to not know if you're going to need to start screening new tenants.
When your tenant files for bankruptcy, it can initiate a period of uncertainty for you, and possibly even create conflict between you and your tenant. There's no doubt that it's going to be difficult, but if you educate yourself about the bankruptcy process and what it means for you, you'll be able to save yourself and your business potential financial losses—and a lot of headaches.
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