Bankruptcy of a Tenant: What You Need to Know
by TSSA Legal Counsel
Bankruptcy is a no-win situation for a landlord. In general, when a tenant files bankruptcy, a landlord’s hands are tied for at least a few months when it comes to collecting overdue amounts. Once a bankruptcy is filed, unless you have received permission from the bankruptcy court, or unless a certain time period has passed, you cannot file for eviction, begin foreclosure or exercise any collection remedies. If you have started either of these procedures, you must “freeze” your effort until the law allows you to continue. Bankruptcy results in an “automatic stay”—this means that until this “stay” is lifted, you cannot take any actions against a bankrupt tenant such as eviction or foreclosure.
What if you have received no paperwork, but the tenant comes to your office, or calls you, to tell you that he has filed for bankruptcy? If you knowingly violate the automatic "stay," you are subject to sanctions and potentially punitive damages if you move forward with your action (e.g., foreclosure) and a bankruptcy has indeed been filed. It is therefore likely not a good idea to ignore someone's statement that they have filed. However, while you should not disregard your tenant's claim of filing, you should, in TSSA legal counsel's opinion, do your best to confirm (or refute) the tenant's claim. If the tenant is not being truthful, and has not filed, you may move forward with your action. You can ask the tenant for a case number and/or the name and phone number of his bankruptcy attorney. It is easy to verify bankruptcy filings with the bankruptcy court, especially with a case number.
You can verify/lookup the status of a bankruptcy at https://www.pacer.gov/ and you can also check the Texas District Court website at https://www.txs.uscourts.gov/. If you act reasonably in attempting to verify the filing, you may avoid punitive sanctions if you elect to go forward in absence of verifiable information as to the filing. But clearly, the most cautious approach, and the recommended one, is that if someone tells you that they have filed for bankruptcy, stop ("freeze") any ongoing collection activity (for example, if you have already overlocked, you can leave the overlock on, but do not proceed to foreclosure), until you can verify the bankruptcy filing.
There are a lot of steps and possible decisions and solutions to a bankruptcy situation. This article outlines, in sequential order, some of the most important steps that you may take in TSSA legal counsel’s judgment. You may also want to consult your own attorney with regard to bankruptcy matters. But first and foremost: act quickly. The quicker you start to
act, the quicker you can get a paying lessee.
1. Stop all collection activity.
Your first step should be to immediately stop all collection activities against the
tenant once you receive notice of a legitimately-filed bankruptcy. Failing to stop collection efforts upon notice may lead to
severe monetary penalties.
2. Note the date of notice.
Make a note in your files of the date upon which the bankruptcy was filed: any late
fees not already assessed on amounts owed as of that date cannot be assessed. If you do not have a written notice (i.e., the
notice was oral), then insist on a copy of the notice and/or a case number.
3. Strike a deal.
Try to negotiate a deal with the tenant if the tenant has filed under Chapter 11 or 13. If a tenant of yours has filed for Chapter 11 or Chapter 13 bankruptcy, you might want to consider forgiving his debt or even paying him a token amount to come and take his things away. In a Chapter 11 or 13 bankruptcy, you may lawfully agree to forgive all of the tenant’s debt in exchange for voluntarily vacating the unit. The tenant will probably need this agreement in writing to show to his lawyer so his bankruptcy plan can be amended. You cannot legally make a deal to forgive only part of the debt in exchange for immediate payment—even if it is partial payment. A debtor (tenant) does not have the authority to pay you anything except what a court approves under a bankruptcy plan. It may also be worth the effort to call the trustee’s number
(listed on the notice of a Chapter 7 bankruptcy) and make the same move-out offer deal.
Forgiving a debt entirely or even paying a tenant to move out is difficult to do when you know a tenant owes you money, but on the other hand, you are otherwise looking at going for months without payment, spending attorneys’ fees, and possibly getting 50 cents on the dollar or less as repayment under the tenant’s bankruptcy plan.
If a tenant has filed for Chapter 7 bankruptcy, the law prohibits you from making any type of agreement directly with the tenant. In a Chapter 7 bankruptcy, the items in the unit now legally belong to the tenant’s bankruptcy trustee and not the tenant. Any “deal” would have to be approved by the Chapter 7 bankruptcy trustee. The bankruptcy notice you receive will tell you what chapter the tenant filed under.
4. File a Proof of Claim with the bankruptcy court
. When you receive notice of the bankruptcy in the mail, you should file a document called a Proof of Claim with the bankruptcy court (however, if it is a Chapter 7 bankruptcy, normally no Proofs of Claim are allowed to be filed absent court request). In a Proof of Claim, you list all debts the tenant owes you that were due before the bankruptcy was filed. Normally, the court will send you a Proof of Claim form that you can fill out. Otherwise, your lawyer can submit a Proof of Claim on your behalf. There is a deadline for filing the Proof of Claim, so make sure you read the court’s documents and comply with that deadline.
When you file your Proof of Claim, make sure you file it as a “secured” claim rather than an “unsecured” claim (there will be a check box on the form where you can indicate that it is a secured claim). Your claim is secured by a lien on the contents of the unit. The lien is described in paragraph 22 of your lease and in Chapter 59 of the Texas Property Code. You will need to attach a copy of your lease to the Proof of Claim that you submit.
If a debtor has listed you as a creditor, you should receive a Proof of Claim form from the court in which the debtor filed bankruptcy. If not, and the debtor did not file for bankruptcy in the Western District, you may get a copy of the proper Proof of Claim form by calling the clerk for the appropriate court (most courts have a website, and the clerk can tell you how to download the appropriate form or how to get a hard copy if you don’t have internet access). The clerk’s contact information should be on the notice of bankruptcy you receive.
5. Hire an attorney to “lift” the bankruptcy stay.
When the court “lifts” the bankruptcy stay, it means the court is allowing you to go forward with your self-help on judicial remedies. Paying attorneys’ fees may only be worth your while if a tenant owes you a considerable amount of money. It is most likely going to cost you several hundred dollars to hire an attorney to petition the bankruptcy court to allow you to foreclose or file for eviction. However, if the tenant owes you a considerable amount of money and shows no sign of paying any rent that has become due after he filed for bankruptcy (post-petition debt), it may be worth your while to hire an attorney and act quickly.
6. Take action yourself 60 days after the bankruptcy is filed.
The tenant’s bankruptcy trustee (in a Chapter 7bankruptcy) or the tenant (in Chapter 11 or 13 bankruptcies) must assume or reject the tenant’s lease within 60 days after the bankruptcy is filed under Section 365(d)(4) of the Bankruptcy Code. If the trustee or tenant decides to “assume” a lease, he must cure any default and show adequate proof to the court that future rent will be paid.
The tenant’s bankruptcy plan (which you should receive a copy of) should tell you whether the trustee is accepting or rejecting your lease. If you have a question and the 60-day time period is nearing, you should call the trustee or the tenant’s bankruptcy attorney and find out if the trustee is going to accept or reject the lease. The trustee’s name and contact information should be on all court documents. If the trustee does not accept the lease within the 60-day period after the tenant files for bankruptcy, then the lease is deemed to be rejected, and the trustee must immediately surrender the property.
Rejection of a lease does not mean that the lease is terminated, but simply means that the trustee or tenant has decided that the lease will not be part of the bankruptcy estate. If the lease is rejected, the obligations of the lease simply become obligations of the tenant again—without being subject to the bankruptcy. The ball is in the landlord’s court at this point to terminate the lease, give an eviction notice or begin the foreclosure process. Once you have confirmed that a lease has been rejected, you can exercise your remedies just as if the bankruptcy did not exist.
If the tenant owes you a considerable amount of money, you may file a petition with the bankruptcy court requesting that the court shorten the 60-day time frame in which the lease must be assumed or rejected. Your bankruptcy attorney can do this for you if this action is appropriate.
7. What about rents that become due after the tenant declares bankruptcy?
What if the tenant was current in rent before bankruptcy was declared, but since the time he declared bankruptcy, he has not paid any rent or has missed certain payments? Under bankruptcy law, the tenant is required to keep “post-petition debt” (debt that has become due after the bankruptcy was filed) current. If the tenant doesn’t do this, the first thing you should do is call the tenant’s bankruptcy attorney. Tell the attorney that his client is not keeping post-petition debt current and that you will turn the matter over to a lawyer if payments are not made immediately. The tenant’s bankruptcy attorney should then instruct the tenant to get the debt current. If the tenant does not bring post-petition debt current, then in order to enforce your claim for rents, you (your lawyer) must file a motion with the bankruptcy court asking the debt to be classified as an “administrative claim,” which is given a high priority for payback.
8. Tips to keep from getting “burned” by a tenant’s bankruptcy.
There are several things you can do to prevent yourself from being hurt by a tenant’s bankruptcy. Probably the most important thing is to make sure you don’t let a tenant get too far behind in rent payments. Exercise your foreclosure rights quickly or evict the tenant quickly before the tenant has the time to declare bankruptcy. Bankruptcy is a very specialized area of the law, and if you find yourself on the other side of an increasing number of tenant bankruptcies, in TSSA legal counsel’s opinion, you would be well-advised to retain an attorney specializing in bankruptcy to assist you.
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