Filing for bankruptcy is one way to get out of debt and start fresh financially.
Like other people, landlords sometimes get into financial trouble and have problems making the mortgage payments on their rental properties. In some cases, your landlord may choose to file bankruptcy.
Tenants who have significant financial burdens may also choose to declare bankruptcy.
The crucial matters for landlords and tenants in bankruptcy are:
- Will the lease survive the bankruptcy?
- Will the bankruptcy stop an eviction action?
Bankruptcy is a legal process people can use to eliminate or repay some debts. Bankruptcy has a language all of its own, and can be confusing for those who haven’t familiarized themselves with certain important terms. Here are a few of the terms you should know.
- The debtor is the person who has filed for bankruptcy.
- The creditors are the people (or businesses) to whom the debtor owes money.
- A bankruptcy trustee is the party responsible for administering the bankruptcy case.
- As soon as a bankruptcy action is filed, it triggers an automatic stay. This is an injunction that immediately stops creditors from trying to collect debts from the debtor.
- A claim is when one of the creditors files a document with the bankruptcy court stating that the debtor owes the creditor money. If there are assets to distribute in the bankruptcy, creditors must file a claim in order to get paid.
- A discharge is when the debtor is relieved from paying certain debts, such as back rent (unpaid rent), credit card debt, and medical debt.
What Happens to the Lease in a Bankruptcy?
When either a landlord or tenant files for bankruptcy, there are two things that can happen to the lease. The landlord or tenant (actually, the trustee) can either:
- assume the lease, that is, allow the lease to continue in effect, or
- reject the lease, which essentially terminates or cancels the lease.
What Happens If the Lease Is Assumed
If the lease is assumed, both parties must continue to perform all covenants or "promises" made in the lease.
As a tenant, your primary responsibility under almost any residential lease is to pay rent, which you'll have to continue to do if the lease is assumed.
Landlords of assumed leases must continue to keep the premises structurally safe and "habitable." That is, the landlord must do maintenance work and make any repairs (such as to the heating, plumbing, and electrical systems) that are needed.
What Happens If the Lease Is Rejected
When a lease is rejected, this is treated as a breach of the lease. Both the landlord and tenant have remedies for the early termination or cancellation of the lease.
If the tenant-debtor rejects the lease, the landlord can give the tenant notice to quit (see below). After that, the landlord can begin eviction proceedings if the tenant doesn't leave.
If the landlord-debtor rejects the lease, the tenant can usually:
- file a claim in the landlord's bankruptcy for damages resulting from the rejection and early termination of the lease, or
- stay on the property for the remainder of the lease and offset (reduce) the rental payments by any damages suffered as a result of the landlord's failure to provide services under the lease, such as power, heat, and trash disposal.
Tenant Bankruptcies and Evictions
In the past, tenants could stop an impending eviction by filing for bankruptcy protection. (The automatic stay would stop the eviction from proceeding.) That's no longer necessarily the case.
Now, whether the tenant can prevent an eviction by filing bankruptcy depends on whether or not the landlord has already received a judgment for possession (an eviction order) from a court.
What Happens If the Landlord Doesn’t Yet Have a Judgment For Possession
If your landlord hasn't already received an order of eviction against you and you file bankruptcy, the automatic stay will prevent the landlord from evicting you (subject to some exceptions)—at least for a temporary period of time. This is because the landlord cannot start or continue an eviction suit while the automatic stay is in place.
For example, this means a landlord cannot serve you a notice to quit during this time.
What is a notice to quit? A notice to quit is a notice to leave the premises within a certain amount of time. This is the first step in an eviction. The length of time that a notice to quit gives you before you have to leave varies from state to state. For example, California and Colorado law require a three-day notice to quit if you don’t pay rent. New Hampshire law requires a 30-day notice to quit for lease violations other than not paying rent (or seven days' notice for the nonpayment of rent).
Exceptions. The landlord can file a motion with the court to get relief from the automatic stay. If relief is granted, the landlord can proceed with the eviction.
Also, an eviction action is not stayed if you engaged in illegal drug use on the property or endangered it. To proceed with an eviction, the landlord simply has to file a certification with the court (and give you a copy) that states:
- an eviction action has already been filed on these grounds or
- that you have used illegal drugs on the property or endangered the property within the last 30 days.
If you don’t object, the eviction will continue. (The court will hold a hearing if you do object.)
What Happens If the Landlord Has Already Obtained a Judgment For Possession
If the court enters a judgment for possession in favor of the landlord before you file your bankruptcy, the landlord can ordinarily proceed with the eviction.
Exception. The automatic stay will stop an eviction if your state’s laws say you are entitled to get caught up on rent (“cure” the monetary default) after a judgment for possession and you:
- file a certification with the court (and serve a copy to the landlord) stating that under state law, you can cure your monetary default after the court enters a judgment for possession, and
- you deposit with the court the rent that would become due during the 30-day period after you filed for bankruptcy.
You must pay also all back rent that was due before you filed bankruptcy within 30 days, and file another certification.
Hiring an Attorney
Bankruptcy laws are complicated, especially when it comes to leases. Whether filing for bankruptcy is in your best interest depends on many factors and your individual situation.
So, if you're considering a bankruptcy, research the federal bankruptcy laws and as well as the bankruptcy laws in your state. Or, probably your best bet is to hire an experienced bankruptcy attorney.
Questions for Your Attorney
- I filed for bankruptcy when I was two months behind on rent. Before I filed, my landlord had called a few times to demand rent. Since I filed, my landlord rarely answers my calls about needed repairs and maintenance. Is there anything I can do to get him to make these repairs?
- As a landlord, how do I decide if I want to reject or assume a lease?
- Can my trustee assume a lease that I want to reject, and vice versa?
- Can I change my mind later after I decide to reject or assume a lease?
- How long does a bankruptcy take?
- I have two months left on my 12 month lease, and my landlord just filed for bankruptcy. What happens if my lease expires while the bankruptcy is still pending?