Tenant Bankruptcy
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      Have you ever had a tenant who, after becoming delinquent in rent payment, files for bankruptcy just as you decide that you need to evict, after you have served the complaint, on the day scheduled for Court appearance, or even after judgment?

When your tenant tells you that you that he/she is filing bankruptcy or when you receive the official notice of filing in the mail, you need to know what it means and what to do next.

The first thing you will want to determine is what type of bankruptcy has been filed.  A Chapter 7 is the liquidation form of bankruptcy wherein assets are sold and proceeds are applied against debts.  In exchange for the discharge of debts, nonexempt property is sold and the proceeds are used to pay off creditors.

Chapter 11, 12, and 13 are reorganization forms wherein the Court approves a payment plan that allows the debtor to eventually pay off part or all of many, maybe even all, debts on an approved plan of usually 3 to 5 years duration. 

Chapter 13 will usually be the form used in a personal bankruptcy where an operating business is not involved because it is the simplest and least costly.  The amount to be repaid depends on the amount of property owned by the debtor and the types of debts owed.   Although a Chapter 13 theoretically means that creditors will be paid, landlords are often at the end of the list and sometimes no creditor receives full payment.
      A landlord should not count on receiving payment of all back rent owed at the time of filing because other debt might have a higher priority.  For example, the Court may decide that it is more important for the the debtor to pay a car payment because a car is required for his/her continuing employment which is necessary for meeting the repayment plan.

When either kind of bankruptcy is filed, an "automatic stay" goes into effect.  The stay prohibits almost all creditors from taking any action to collect the debts owed them, including dunning phone calls, unless the bankruptcy court lifts the stay and lets the creditor proceed with collections.

If a Chapter 7 is filed and the tenant was behind on rent at the time of filing, the amount of past due rent may not be recoverable except from the security deposit.  However, debt incurred since the filing, including rent due after that date, will not usually be discharged by any form of bankruptcy.   Accordingly, there is a possibility of collecting unpaid rents due after the date of filing.

If the tenant pays rent after the date of filing, you might consider keeping him/her, as he/she can't again file bankruptcy for at least 6 years and may be a better credit risk than most possible replacement tenants.  The threat of eviction should motivate the tenant to pay newly owed rents, as he may have trouble renting somewhere else because of the bankruptcy, but if not, get the stay lifted (usually granted quickly) and proceed with evict. Just be sure to obtain rents immediately when due and take necessary action immediately upon default because it is possible that the tenant's financial condition might worsen as bankruptcy proceeds.

If you wish to terminate tenancy, you need to get into bankruptcy court to have the stay lifted (Judges will usually do so), after which you can proceed with eviction if the tenant doesn't voluntarily vacate.  How long it will take depends on the schedule and efficiency of the particular Court where filed and whether or not the tenant wishes to pay his attorney to argue about the issue.

If the tenant owes you money, it is important that you file your claim with the Court as soon as possible.

If you know that there has been a bankruptcy, but the tenant has not named you the landlord as a creditor (you don't receive the filing notice in the mail), any amounts owed will not be discharged and may later be collectable.

If the tenant is current in rent, he/she may purposely avoid naming you as a creditor to avoid termination of tenancy.

If one of two or more tenants who signed the lease files bankruptcy, this will not affect the liability of the other tenants for all terms of the lease.

Finally, if a repayment plan includes payment of amounts owed to you, be sure to bug the Court whenever you don't receive the scheduled payment.