What Happens When Your Tenant Files Chapter 7
Can a Landlord Still Evict?
What do you do when your tenant files for bankruptcy? It may not be a problem you have come across yet, but it is something that every landlord should understand. Do you have the right to evict the tenant? Will you ever collect the money you are owed? Here is what happens when your tenant files Chapter 7.
What Is Chapter 7?
Chapter 7 is one type of bankruptcy. In this form of bankruptcy, the debtor, in this case, the tenant, agrees to liquefy their assets. When the tenant files with the bankruptcy court, he or she submits a list of all debts owed and monthly expenses, as well as all income and assets A third party administrator will then be assigned to the tenant’s case, who will decide how to divide these assets to pay the debts the tenant owes.
After filing for bankruptcy a tenant will be granted an automatic stay, while this sounds like a real estate term, it actually is not. It essentially means that a tenant’s debts will stay where they are. It puts a stop on any creditor being able to collect any debts that they are owed from the tenant. These creditors are prohibited from contacting the tenant or from attempting to collect the debt they are owed.
Reject or Assume the Lease
Tenants filing for bankruptcy have the option of rejecting or assuming the lease. If they reject the lease, this means they must move out of the property. The tenant will still be responsible for any debt owed to the landlord before they filed bankruptcy, but they will not accrue any new charges.
If the tenant assumes the lease, they must become current with all money owed to the landlord, including depositing the next month’s rent owed with the court. If the tenant does not become current, then the landlord can continue with the eviction.
If Landlord Files for Eviction Before Bankruptcy
Certain tenants have tried to avoid being evicted by filing for bankruptcy. The good news for landlords is, if you have begun your eviction proceedings before the tenant filed for Chapter 7, then you are still able to go on with the eviction.
Become Current With Rent: Certain states allow tenants to stop an eviction by becoming current with their rent. In these states, the tenant has the ability to file a sworn statement with the court acknowledging that the tenant has the right under state law to end an eviction by curing the rent they owe. This certification needs to be made at the same time the tenant files for bankruptcy.
At this time, the tenant must also deposit with the court the amount of rent that they will owe the landlord in the next month. The tenant must then provide the landlord with a copy of this statement.
30 Days: The tenant will then have 30 days from the date of bankruptcy to pay the entirety of any back rent owed to the landlord. If the tenant becomes current with their rent, the tenant needs to file a second certification with the court, stating all back rent has been paid.
If the landlord does not object to either certification, the eviction will be stopped. If the landlord objects either time the tenant files the certification, the landlord and tenant will go to court to determine if the automatic stay will be lifted and the landlord can proceed with the eviction.
Defaults Again: If the tenant defaults on their rent again, the landlord will have to file a motion with the court to get the automatic stay lifted. If the stay is lifted, the landlord will have to send the tenant a new notice to pay rent or quit and start the eviction process all over again.
If Landlord Files for Eviction After Bankruptcy
If your tenant has filed Chapter 7, and you attempt to file to evict the tenant, you will be unable to proceed with the eviction due to the automatic stay. However, because of the national law preventing bankruptcy abuse, this automatic stay might be short lived.
While a bankruptcy filing wipes away a tenant’s existing debt, it does not wipe away a tenant’s new debt. Therefore, if the tenant is still living in your property, he or she is still responsible for paying the rent owed for the month. Since this would be considered a new debt, landlords are able to petition the court to get the automatic stay lifted so they can proceed with the eviction. In most cases, the court will agree to lift the automatic stay.
Even if you have not filed to evict a tenant before the tenant files for Chapter 7, there are some situations which will supersede a tenant’s right to the automatic stay. Landlords will have a right to evict a tenant if the tenant has been engaging in illegal drug use or dealing or has otherwise endangered the property within the last 30 days. The landlord must file a certification with the court, stating this claim.
The tenant has a right to object to these claims. If the tenant does not object within 15 days, then the landlord can continue with the eviction. If the tenant does object, then the landlord and tenant will go before the court to determine if there is truth to this claim.
How Do You Collect Money Owed?
When the tenant files bankruptcy, the landlord should file a claim with the bankruptcy court, which is a statement of all the money the tenant owes the landlord. The court will decide the order in which the tenant’s debts will be paid.