Phil Querin Q&A: Resident in Bankruptcy - Landlord's Rights and Responsibilities

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October 4, 2016
Phil Querin
MHCO Legal Counsel
Querin Law

Question. What do you do when you discover a resident has filed for bankruptcy after you have given them a 72 hour notice for nonpayment of rent?  Is the process different if you give them a 30-day notice for cleaning up their space and you discover that they have filed bankruptcy?

 

 

Answer. I’m not a bankruptcy attorney, but can tell you generally what the process entails. The moment the resident files for bankruptcy – or even tells you they filed, you should halt any action you’re in the process of taking. In the case of the 72-hour notice, you should not file for eviction, even though no rent payment was timely made. In the case of a 30-day notice, same thing; don’t file for eviction even though correction was not timely made.

 

The main thing you want to verify is that, in fact, the resident did file for bankruptcy. In such case, they should be able to give you some evidence of the filing, such as the bankruptcy court filing number.  Needless to say, if no filing was made, you are within your rights to proceed, at least until they do file, at which point you should then stop moving the matter forward legally. However, if the resident tells you they have taken out bankruptcy, you should assume it to be true unless and until you verify that that is not the case.

 

Once you have verified that the resident is in bankruptcy, the question is what you should do. Not being a bankruptcy attorney, I cannot tell you how long to expect the entire process will take before the resident exits the process. However, if you are listed in the bankruptcy petition, you will receive a notice of the First Meeting of Creditors, which you should attend. That will give you an opportunity to learn what the resident intends to do, i.e. abandon the home or remain there and resume paying rent. Your goal should be to have the resident resume making rental payments as soon as possible. You will have an idea whether that will occur at the First Meeting of Creditors.  The same thing applies if the resident is under a curable 30-day notice.

 

If the situation is such that the tenant cannot pay, or cannot give you assurances that he or she can pay, or if the resident is under a default notice that is not curable, and you simply want them out, you should confer with a good bankruptcy attorney regarding your alternatives.

 

What you will likely be presented with from your attorney is a decision about whether you should file with the court to “lift” the bankruptcy stay of proceedings[1], so that you may complete whatever legal action you were in the process of taking when the filing occurred. 

 

In the cases I have been involved with in the past, my experience was that if the bankruptcy stay was not going to assist the resident in dealing with his or her debts (e.g. it was a “no asset” case, and there was no chance the resident could pay the rent, etc.) the bankruptcy trustee would likely agree to lifting the stay so that your legal action could proceed.  The decision to file is usually a cost-benefit analysis, e.g. what will the procedure cost, will it get the resident out sooner, and will you be able to get a rent-paying tenant into the space relatively quickly? 

 

The take-away in all bankruptcy filings is (a) you do not want to take any steps (including a demand letter from a lawyer) against the resident the moment you know (or reasonably believe) he or she has filed for bankruptcy, and (b) you want to consult with an attorney to evaluate your legal alternatives.  I have seen many cases where landlords simply stop, wait for the bankruptcy to be over, before pursuing legal action.  That is a mistake. Too many times, the bankruptcy continues for several months, the resident has remained there rent-free for that time, and the landlord is the one who loses. The same thing applies when the resident has abandoned the premises and then files for bankruptcy. While you cannot legally proceed until the stay is lifted or the bankruptcy proceeding has either been dismissed or is completed, waiting without taking action to lift the stay means the space cannot be re-rented to anyone else.  

 


[1] This means that upon filing, everything comes to a halt, i.e. it is “stayed.”