What Happens If Your Tenant Declares Bankruptcy?

When a tenant declares bankruptcy, the landlord’s livelihood may be jeopardized. Learn about your landlord’s rights if a tenant files for bankruptcy.

What you will discover:

In bankruptcy, what is the distinction between a “secured claim,” a “unsecured claim,” and a “administrative claim”?
What exactly is an automatic stay, and how does it impact rent collection when a renter declares bankruptcy?
Can I cancel the lease if a renter files for bankruptcy?
What are the duties of the renter if they accept or reject the lease after a bankruptcy filing?
Understand your rights and responsibilities as a landlord.

A bankrupt renter is never good news for a landlord. Even if you have been collecting full rent so far, this indicates that your renter is experiencing major financial difficulties, which may have an influence on your revenue as well. If a tenant declares bankruptcy, or you suspect that they may, you should be aware of the procedure, your rights and duties as a landlord (and creditor), and how their bankruptcy may effect your livelihood.

In bankruptcy, what is the distinction between a “secured claim,” a “unsecured claim,” and a “administrative claim”?

In a bankruptcy, there are three broad sorts of claims.

Secured claims are debts that are backed up by specified assets. A automobile loan, for example, is secured by the vehicle. In general, secured claims have the greatest priority in a bankruptcy, with the secured creditor having the authority to utilize the asset to repay the obligation.
Unsecured claims are debts that are not backed up by an asset, such as credit card debt. This includes any other form of debt incurred prior to the bankruptcy.
Administrative claims are claims for additional obligations accrued by the debtor after declaring bankruptcy.

The distinction between administrative and unsecured claims is that administrative claims are often paid before unsecured claims. This is significant because the renter may not have the funds to pay all of the claims in full. Administrative claims are paid before unsecured claims because bankruptcy law does not allow debtors to take on and discharge additional obligations once they have begun the bankruptcy procedure.

A landlord’s claims against a tenant might be both unsecured and administrative. Unsecured claims include any rent and other costs accrued prior to the tenant filing for bankruptcy. If the tenant continues to fail to pay rent after declaring bankruptcy, the landlord may file an administrative claim.

What exactly is an automatic stay, and how does it impact rent collection when a renter declares bankruptcy?

When a debtor declares bankruptcy, creditors are typically prohibited from engaging in any form of collection effort outside of the bankruptcy court procedure. Landlords cannot cancel a contract or remove a tenant unless they go through bankruptcy court. Before issuing repeated late payment reminders or conducting other collection procedures, landlords should contact with an attorney.

A “stay” is a legal word for this ban on doing action. It is automated since it is activated simply by the renter filing for bankruptcy. If the tenant is causing damage to the property or is failing to pay rent after filing for bankruptcy, the landlord may petition the bankruptcy court for relief from the stay.

For example, suppose a renter skips two months of rent before declaring bankruptcy. The landlord has an unsecured claim for those two months, plus any late fines or other lease costs. The renter then fails to pay for the month following their bankruptcy filing. The landlord now has an administrative claim for the extra month and may ask the court to lift the automatic stay and enable the tenant to be removed.

Can I cancel the lease if a renter files for bankruptcy?

If a tenant files for bankruptcy, you do not immediately have the right to cancel the lease. You would need a legal reason to terminate, such as a breach of the lease agreement’s no-pets clause. If you discovered that your renter had filed bankruptcy but had been completely complying with the lease agreement, you would not be entitled to cancel their lease just because they had declared bankruptcy.

Keep in mind that, in addition to federal bankruptcy law, state and municipal laws may provide renters with extra safeguards. You may need to go through the state court eviction procedure in addition to requesting the court’s authorization to terminate the lease. Tenants have extra privileges during the COVID-19 epidemic, including protection from eviction for nonpayment of rent during federal and state eviction moratoriums.

If both you and your renter think it is in your best interests, you and your tenant may voluntarily agree to terminate the lease. However, you must be careful not to give the impression that you are pushing or pressing the renter to do so in violation of their bankruptcy rights.

What are the duties of the renter if they accept or reject the lease after a bankruptcy filing?

In most cases, a tenant has the ability to cancel their lease in the event of bankruptcy. The default decision date for them is 60 days following filing.

If the renter accepts the lease, they undertake to uphold it. They must pay any future sums agreed upon and any past due amounts in full and on schedule as ordered by the court.
The lease may be terminated if the renter refuses it. The tenant’s duty for future rent stops on the date of termination or when they actually depart the premises, whichever comes first. As part of the bankruptcy process, the landlord may lodge a claim for any sums owing.

Understand your rights and responsibilities as a landlord.

Because of the intricacies of federal bankruptcy law, as well as federal and local tenant safeguards as a result of COVID-19, it is always a good idea to understand all you can about the process and how it affects you as a landlord.