A bankruptcy filing will impact your relationship with your tenant. If their debts are discharged, you won’t get back rent you’re owed. But while you may focus on the protections the tenant may get through bankruptcy, you also have rights. Simply filing a case in federal bankruptcy court doesn’t result in the debtor automatically getting a financial “Get out of jail free” card.
AWB Law PC helps residential landlords across Orange County with tenant issues, including bankruptcy and eviction matters. After a tenant files for bankruptcy, we can help you understand your rights and take the next steps. Call us at (949) 244-4207 if you have questions or want assistance.
What Is Bankruptcy?
Bankruptcy is a legal process that balances a debtor’s possible financial “fresh start” by discharging past debts with creditors’ (including landlords’) legal rights. It exists under the federal Bankruptcy Code and is administered through a unique system of federal courts.
Most tenants file under one of two chapters under the federal code:
- Chapter 7 involves liquidating or selling assets (within limits) to pay debts. A trustee (a person appointed by a judge to manage the debtor’s finances) sells the debtor’s non-exempt property and pays creditors from the proceeds. Many Chapter 7 cases have no property that can be sold, and these are referred to as no asset cases
- Chapter 13 is for those earning a regular income. It lets the debtor keep their property and repay debts over three to five years through a court-approved plan. These plans are usually very strict. Many debtors can’t maintain the payments, so their cases are converted to Chapter 7
A Chapter 7 case, depending on its complexity, may take four to six months to complete. A Chapter 13 case involves a three- to five-year payment plan that may become a Chapter 7 case at any point in the process.
What Protections Does a Tenant Get When They File for Bankruptcy?
As soon as a tenant files, an automatic stay begins. This stops most creditors (including landlords) from taking action to collect debts. It also temporarily stops most current eviction efforts.
The bankruptcy process can affect evictions:
- If the tenant files for bankruptcy after you have a Judgment of Possession, the automatic stay doesn’t apply
- If the eviction case is ongoing, we can file a Motion for Relief from the Automatic Stay with the court. If the judge approves it, the automatic stay will be changed or lifted. If that happens, we can continue the eviction process (though it will be limited to recovering the unit, not obtaining money)
- If the motion is denied, the eviction process can proceed when the bankruptcy case ends
In Chapter 7 cases, the bankruptcy trustee has 60 days to decide whether to keep or end the tenant’s lease. If no decision is made within that time, the lease is rejected and ends.
What Should You Do If a Tenant Files for Bankruptcy?
There are things you can do to protect yourself after learning about a filing:
- Contact the bankruptcy court to confirm the details
- File a claim with the bankruptcy court for any rent the tenant owes you. The court decides if, how, and when it will be paid. Filing a claim puts you on record as a creditor in the case, so you’ll receive notices and updates
- Keep clear records of rent payments and communication
- Ask the court to lift the automatic stay if you need to continue an eviction that already started
Bankruptcy law is complex, but it’s in your interest to participate in the process.
What Should You Avoid Doing?
Some actions can get you in legal trouble during a tenant bankruptcy case. Do not:
- Change the locks, shut off utilities, or remove the tenant’s things without a court order
- Call, email, or send notices asking the tenant to pay rent without the court’s permission
- File a lawsuit against your tenant for unpaid rent without asking the court first
- Try to collect debts on your own instead of going through the bankruptcy court
Ignoring the stay of debt collections could get you fined by the bankruptcy court.
What Happens If the Tenant’s Debts Are Discharged?
A discharge is the case’s final step. It releases the tenant from paying certain debts, so creditors, including landlords, can’t legally collect them. In Chapter 13 cases, the tenant gets a discharge after completing all payments under their plan. Until then, like Chapter 7, they’re protected from lawsuits and other collection actions.
What Happens If the Tenant’s Case Is Denied or Dismissed?
A bankruptcy filing can fail for any number of reasons. Depending on the circumstances, they may re-file and try again. After the case ends unsuccessfully, you can move forward with collecting back rent or pursuing an eviction, following the normal legal process as if the filing never occurred.
Frequently Asked Questions
- Can I evict a tenant who filed for bankruptcy? It depends on timing. If you already had an eviction judgment before the filing, you can continue. If not, you need to ask the bankruptcy court to lift the automatic stay first.
- What is the automatic stay? It’s a court order stopping most creditors, including landlords, from collecting debts or continuing legal actions once a tenant files for bankruptcy.
- Do I need to file anything with the bankruptcy court? You should file a claim for any rent owed so the court has a record of your debt.
- What happens to unpaid rent if the tenant’s debt is discharged? The tenant is no longer personally responsible for that debt, and you cannot try to collect it after the discharge.
- What should I not do during a tenant’s bankruptcy case? Never change the locks, shut off utilities, or try to collect rent on your own without asking the court first for permission.
We’re Here to Help
If you have questions about a tenant bankruptcy filing, call the AWB Law PC team at (949) 244-4207. We can discuss your situation, how state laws may apply, and how you might proceed.
