Bankruptcy & Litigation Series: #6 Eviction - Tenant Bankruptcy

When one of the parties in a landlord-tenant relationship goes bankrupt, the result is very different depending on whether it is the landlord or the tenant.  As described in the previous post, when the landlord files for bankruptcy, the lease may continue even if the landlord abandons it to the trustee.  But what happens to a Landlord or Eviction Suit when the Tenant files for bankruptcy?

Just like a collection action, an Eviction proceeding is automatically stayed during the pendency of the filing.

The tenant can elect to assume or reject the lease.  If the tenant assumes the lease, any arrears must be brought current.  The landlord can file a motion for relief from stay to proceed with the eviction, but cannot pursue the debtor for pre-petition unpaid rents.   If the debtor assumes the lease, his financial obligations to the tenant must be either current, or in the case of a debtor in possession, must provide adequate assurances (in the form of money) that he can continue to afford his maintenance of the lease obligations.  Otherwise, the lease is deemed rejected.

Bankruptcy & Litigation Series: #5 Eviction - Landlord Bankruptcy

The tenant will receive a notice of bankruptcy.  A landlord can elect to assume (i.e., keep) or reject (i.e., end) a lease per 11 U.S.C. s. 365.

If the debtor-landlord elects to reject the lease, the terms of the lease can be administered by the trustee.  If the debtor assumes the lease, his financial obligations to the tenant must be either current, or in the case of a debtor in possession, must provide adequate assurances (in the form of money) that he can continue to afford his maintenance of the lease obligations.  Otherwise, the lease is deemed rejected.  If a tenant will be displaced by a debtor-landlord, he should file a proof of claim for his damages, and will be compensated pro-rata in the event that there are any bankruptcy assets.

FAQ #18: Will I be able to rent an apartment after filing?

Yes, but you may have to shop around a bit. Each landlord has the discretion to rent to a particular tenant based on a number of legal factors, including the landlord’s determination of a tenant’s ability to pay the mortgage each month.

The landlord’s ultimate decision may depend on the circumstances that led up to the bankruptcy and a number of other factors, such as recommendations from previous landlords or other personal references. Most landlords will evaluate whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility.

As a practical matter, the ability to rent an apartment in the future should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your chances, even if you don't file bankruptcy. In that sense, not filing for bankruptcy may make you more of a financial risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility.

Honesty is often the best policy. If you know your prospective landlord will be running a credit check, be up-front and honest about what your credit contains, and the reason for your past financial difficulty. While you may need to provide more information to convince a prospective landlord, there are still many landlords who are willing to rent to tenants with a bankruptcy in their past.