BANKRPUTCY LAW FOR LANDLORDS

BANKRPUTCY LAW FOR LANDLORDS

There is a lot of confusion for property managers surrounding bankruptcy - what does it do, what happens if there are multiple filings. It is important for managers to know some basics about BK law. We want to review some basic information about bankruptcy, and then focus on misconceptions around multiple bankruptcy filings. This is important for current residents, but also affects what applicants you approve. For example, just because a resident filed bankruptcy last year, doesn't mean they won't do it again and cost you lost rent.

A tenant filing bankruptcy can create a real problem for a property owner or manager. When a person files bankruptcy, in most cases, there is an automatic stay in place that prohibits any creditor from taking action against that tenant. This means that you can't send them any notices or file an eviction against them (amongst other things, this means no non-payment notices, no non-compliance notices, no non-renewals and no evictions). Effectively, they are untouchable until you go into the bankruptcy court and get an order that allows you to start the eviction. This order is called a lift stay order, because it "lifts" the automatic stay that protected them.

Think of the automatic stay as a bubble that protects the person who files bankruptcy. You can't touch them while they are in the bubble. You need to get a "lift stay" order from the bankruptcy court, before you take any action against them.

This "automatic stay" (the bubble) happens immediately when someone files bankruptcy. Many people believe that if someone has filed bankruptcy in the past 7 years that they can't refile and they can't get a new automatic stay. That is not necessarily true.

Whether someone can refile depends on whether they previously completed the bankruptcy process and obtained a "discharge" order. If someone gets a discharge order, they can't get another one, for up to 8 years following the filing of the first one.

However, what about a resident or applicant who is playing games? We see residents file bankruptcy to get that automatic stay, only to allow the case to be dismissed a month later. Sadly, those people can refile again and the automatic stay does get reinstituted. Due to this we see abuses of bankruptcy court.

Bankruptcy law was changed in 2005 to somewhat curb this abuse. The law now says that if a person files a second bankruptcy in 12 months, the automatic stay applies but only lasts for 30 days, unless extended by the court. Further, if the person files 3 bankruptcies in 12 months, that no automatic stay exists in the 3rd bankruptcy unless ordered by the court.

You may be thinking, do people really file 3 bankruptcies? The answer is absolutely - we see it all of the time. It is because of this we don't generally suggest approving people with a bankruptcy on their record or if they have one, there must be a discharge order. Anything short of that may be asking for you to get caught up in bankruptcy court. Individuals definitely can file bankruptcies, and use them for their benefit and to the detriment of their landlords , several times more than just once every 8 years.

Remember, if you have someone that moves in and then files bankruptcy, you need to immediately note your file, don't take any further action against them and contact counsel to get a lift stay order.

If you don't get a lift stay order, and you violate the automatic stay by taking action against a tenant in bankruptcy, you could be opening your company to significant liability.

This newsletter is for general informational purposes only and does not constitute legal advice.