Your tenant filed for bankruptcy; how does that affect your landlord-tenant relationship?

Uh oh! Instead of receiving this month’s rent check in the mail you received a notice of voluntary petition for bankruptcy from your tenant. What does that mean to you Mr. Landlord?

The first thing to understand about bankruptcy in landlord-tenant relationships is that the simple filing of a petition for bankruptcy protection enacts a very powerful federal law – 11 USC § 362 – the automatic stay provision of the bankruptcy code. The automatic stay is, quite literally, a stay – meaning stop – of any and all collection activity of any kind or nature against the petitioning debtor; and like its name, it happens…automatically upon the filing of the petition. You won’t receive any special notification from your tenant or the court telling you this stay exists because under the code it just does and you are expected to know that.

What this automatic stay means to you is significant. The bankruptcy code is very liberal in identifying what constitutes collection activity. For all of the landlords out there that includes simply sending a demand for possession for non-payment of rent, or even filing an eviction action to recover the possession of your property. This automatic stay is so powerful that it even applies to actions to terminate a tenancy even when you aren’t asking for any payment. Once your tenant files for bankruptcy you are precluded from taking any action to enforce your rights against them until the bankruptcy is discharged or the automatic stay is lifted.

Getting the automatic stay lifted in a bankruptcy case can be accomplished by a knowledgeable landlord-tenant attorney. There may even be limited circumstances that a savvy landlord-tenant attorney can get you relief from the automatic stay without filing anything with the bankruptcy court. No matter what, the worst thing you can do when you receive notice of your tenant’s bankruptcy filing is to do nothing.

Landlords stand to lose two very important things when faced with a tenant’s bankruptcy filing: money from unpaid rents and lost expectation from the loss of the landlord’s ability o make productive use of his property. Landlords must be proactive in protecting and enforcing their rights in a tenant’s bankruptcy in order to mitigate loss.

It is important for landlords to understand that the vast majority of tenant bankruptcy proceedings mean that your tenant’s debt to you is extinguished. There is usually very little you can do about this other than getting a stay lifted to remove them from your property. There may be times when the tenant’s financial obligation survives their bankruptcy petition. It is also important for landlords to understand the difference between pre-petition obligations and post-petition obligations.

Without having a full grasp on bankruptcy proceedings in landlord-tenant relationships landlords can suffer tremendous losses. Be sure to contact an experienced and knowledgeable attorney at the Law Offices of Aaron D. Cox, PLLC to discuss your options the next time your tenant files for bankruptcy.

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