By considering the current situation of the real estate market, several people who once owned their houses, now search for renting. But the basic situation remains the same. As a landlord, their responsibility has not been changed. First, the landlords must know bankruptcy laws and basics to lower the probable financial and legal problems if a tenant decides to file bankruptcy.
1. Bankruptcy chapters
Tenants may file their bankruptcy petitions under the Chapter 7 or Chapter 11. If the tenant cannot successfully reorganize his finances, a Chapter 11 case may turn to a Chapter 7 case; when this happens, a trustee will be appointed by the court.
2. What are your rights as a landlord?
If your tenant has forgotten to pay the rent for more than 3 months not paid rent for several months you may have initiated an eviction. Unfortunately, if your tenant files for bankruptcy protection, you can’t evict him temporarily. You might need to coordinate with the bankruptcy court and get a permit from the court before proceeding for the eviction. If you fail to follow the proper eviction processes, you might have problems legally.
3. Automatic stay
As soon as the a tenant files for bankruptcy, all collection proceedings against him will be stopped. No one can force the tenant in an unlawful manner or by any other efforts to collect the rents. Filing bankruptcy enables an "automatic stay," creditors are not allowed to take any type of action against the tenant without the court’s permission. However, the landlord can collect rent from the guarantors (if any) whose name is listed in the lease agreement, even when the tenant is bankrupt.
4. Outstanding rent - Tenant mustn’t stop paying
If the tenant is staying in possession of the leased property, he must pay all of the rent and other due charges as per the lease agreement during the bankruptcy. This situation will remain effective as long as the tenant remains in possession of the property. But if there are any unpaid rent or any dues that were chargeable before the tenant filed for bankruptcy, then he doesn't have to pay anything for staying in possession of the property.
5. Tenant will get seven-month to decide
After filing bankruptcy, the tenant will have three options from which he has to select one option - a. Rejecting the lease, b. Keeping the lease, or c. Assigning the lease to others.
The tenant has 120 days to select any one option from the above to manage his lease, as per the court’s order. The tenant can ask for 90 days more to modify his decision. That means the tenant is getting a total of 210 days, or nearly 7 months after filing bankruptcy. After completing the 210-day time-frame, the court will not entertain any further time extensions unless the landlord allowed an additional time. But first and foremost, the tenant need to be current on his rents during the seven-month timeframe.
a. Rejecting the lease - The tenant will reject the lease if it is priced over the current market rate. It is nearly impossible for a landlord to convince the tenant for retaining the lease, it’ll be very unfavorable for him. A tenant must inform the court and the landlord that he no longer intend to keep the lease. Once the bankruptcy court allows the tenant to reject the lease, the tenant should immediately surrender his possession of the property and stop the rent payment. The unpaid rent will turn into an unsecured debt of the bankruptcy estate.
b. Keeping the lease - A tenant may feel that the lease is beneficial for him and decide to keep it if the market rate is high. In bankruptcy, this is named as “assuming” the lease. The tenant has to take permission from the bankruptcy court for assuming the lease and must pay off all the unpaid previous rents. If it is not possible for him at that time, then he can assure the court and the landlord that he will meet existing expenses, including any attorneys’ fees incurred by the landlord that is mentioned in the contract, but not the attorney's fees incurred in bankruptcy court litigation. The tenant must also have to show the court that he is really able to carry out lease obligations.
c. Assigning the lease to others - If the value of a lease is under market, the tenant can assign the lease to another person. Here, the original tenant needs to take prior permission from the bankruptcy court. He must pay off all the outstanding rents and other due expenses related to the lease. In some special cases, the new tenant might willing to pay the original tenant’s past due rents and other charges.
6. Shopping Center Landlords
Shopping center landlords have greater rights over new tenants. They are now having four stronger protections against tenants who filed bankruptcy. To replace the old tenant, the new tenant must be financially as strong as the original tenant. Secondly, the new tenant must assure that the rent percentage will not decline heavily. And last but not the least, the assignment may not violate any location, use, radius or exclusivity provision of the lease, or of any other leases, at the shopping center.