A personal bankruptcy can be traumatic for anyone. Typically, a bankruptcy debtor's credit is damaged severely, making it nearly impossible to buy a car or a home. And, in today's economy, bankruptcies are on the rise as all types of consumers struggle with debt.

Landlords and tenants are no exception. In fact, there's been an increase in bankruptcies in the residential rental market as tenants try to use bankruptcy to stop or avoid evictions, which are typically caused by their failure to pay rent. And, either because of reduced rental income or just general market matters, landlords have trouble paying the mortgage on the rental and face bankruptcy or foreclosure.

For landlords and tenants in bankruptcy, some matters arise that don't typically arise in other personal bankruptcies. For example, a tenant-debtor often loses his or her residence as a result of a bankruptcy, while the typical homeowner has protection against losing his or her home. The crucial matters for landlords and tenants are:

  • Will the lease survive the bankruptcy?
  • Will the bankruptcy stop an eviction action?
  • The bankruptcy laws are complicated, and be even more so when it comes to leases. 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.

    Some Bankruptcy Basics

    The bankruptcy laws are very complex, but for our purposes, you need to know that:

    • You're the debtor, the person who has filed for bankruptcy protection
    • A trustee is appointed by the bankruptcy court, and he or she is responsible for things like reviewing your assets and debts, selling or liquidating your assets and collecting money owed to you and using those funds to pay your creditors
    • As soon as your bankruptcy action is filed, there's an automatic stay, which immediately stops all lawsuits, foreclosures and debt collections against you
    • A claim is when one of your creditors files a paper with the bankruptcy court stating that you owe the creditor money and the creditor wants to be paid when your assets are sold

    • A discharge is your goal: it's when you are relieved from paying all (or at least most) of certain of your debts, such as back rent (unpaid rent), and credit card and medical bills

    What Happens to the Lease?

    Generally, when a landlord or tenant files for bankruptcy, there are two things that can happen to the lease. The landlord or tenant (or actually, their 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

    If you assume the lease, you have to continue to perform all covenants or "promises" you made in the lease. So, as tenant, you're primary responsibilities under almost any residential lease is to paying rent and keep the premises clean, which you'll have to continue to do after the landlord files for bankruptcy protection. For the landlord, you have to continue to keep the premises structurally safe and "habitable," that is, provide adequate heat, water, and power.

    If you reject the lease, then you'll be liable for breaking the lease early; both the landlord and tenant have remedies for the early termination or cancellation of the lease.

    If the tenant-debtor rejects the lease, as the landlord you can give the tenant notice to quit, that is, a notice to leave the premises within a certain amount of time, which is usually 30 days under most states' landlord-tenant laws. After that, you can begin eviction proceedings if the tenant doesn't leave. And, in most states, the tenant will have to pay all the rent that would have been due if the lease had continued until it expired.

    If the landlord-debtor rejects the lease, as for the tenant you can:

    • File a claim in the landlord's bankruptcy for damages resulting from the rejection and early termination of the lease
    • Stay on the property for the remainder of the lease and off-set or reduce your rental payments by any damages you suffer as a result of the landlord's failure to provide services under the lease, such as power, heat and trash disposal

    Impact on Evictions

    If your landlord hasn't gone to court and gotten an order of eviction against you, then you can file for bankruptcy protection, and the automatic stay will prevent the landlord from beginning an eviction action against you.

    In the past, tenants could stop an eviction by filing for bankruptcy protection. Even if a landlord got a court order of eviction, a tenant could file bankruptcy and the automatic stay would stop the eviction. That's no longer the case. Under the current bankruptcy law, the automatic stay will not stop an eviction if the landlord obtained an order of eviction before you filed for bankruptcy.

    There are, however, two exceptions. The automatic stay will stop an eviction if, within 30 days of the date you filed for bankruptcy, you file a certification with the court and the landlord stating that:

    • Under the state landlord-tenant law, you are entitled to "cure" or fix the problem that caused the eviction, and you deposit with the court the rent that would become due during the 30-day period after you filed for bankruptcy, or
    • You have paid all back rent that was due before you filed bankruptcy

    Questions for Your Attorney

    • I filed for bankruptcy at a time when I was 2 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?

    Tagged as: Real Estate, Landlord and Tenant Law, landlord bankruptcy, tenant bankruptcy