Despite the booming economy, bankruptcy filings are up, and consumer bankruptcy filings are way up. If you have ever been on the receiving end of a “Notice of Commencement of Case” from the Bankruptcy Court, you know the sinking feeling that you are not going to collect the money you are owed. If you don’t know that feeling, count yourself lucky. That notice also includes a warning that “creditors may not take certain actions” pursuant to the “automatic stay.” Basically, bankruptcy protects debtors from those to whom they owe money, and therefore you can do nothing outside of the Bankruptcy Court to collect what you are owed; that includes evicting a tenant who is not paying rent.
Does this mean you have to allow your bankrupt tenant to stay forever while paying you no rent? Thankfully, the answer is no, but only if you follow the proper procedure in the Bankruptcy Court and hold the tenant to the letter of the law.
Relief for the landlord is provided for in Section 365 of the Bankruptcy Code, a dreaded bit of legislation which is 12 pages long and contains 105 subsections. In a nutshell, this provision requires that the offending tenant must within 60 days of the filing of the bankruptcy:
- “Assume” the lease; or
- “Reject” the lease. If the tenant assumes the lease, it must either:
- Pay the “post-petition” rent (the rent that is due after the date of the bankruptcy); or,
- Provide “adequate assurance” that post-petition rent will be paid. If the tenant rejects the lease, Section 365 provides that the rejection is a breach of the lease. If non-residential property is involved, and the lease is rejected, the tenant must surrender the property to the landlord. If the tenant does not assume or reject the lease after 60 days, it is deemed rejected.
How does this affect you as a landlord with a Bankruptcy Notice in your hand? It means that the tenant is required to pay post-petition rent; or surrender possession; or provide some guarantee that post-petition rent will be paid. Note that Section 365 does not provide any extra protection for rent unpaid prior to the bankruptcy; that debt is treated the same as any other unsecured non-priority debt. (You will likely collect pennies on the dollar if you are lucky.)
Unfortunately, notwithstanding these provisions, nothing will happen automatically. Bankruptcy Court is set up to protect the debtor, not the creditor, and you, as landlord, must take action to ensure that the tenant is held to the rules. Reading the above, you may conclude that if the tenant does not pay rent or surrender the premises, you can go to landlord/tenant court and have the tenant evicted, right? Wrong. Even though the tenant is not following the bankruptcy rules, you still must go through the Bankruptcy Court and get relief from the automatic stay. A motion for relief from the automatic stay must be filed, and the Court will hold a hearing. Only after the Bankruptcy Court has granted relief from the automatic stay, can you go to landlord/tenant court to have the troublesome tenant evicted.
All is not lost (leased?) if your tenant declares Bankruptcy, but prompt, methodical, and careful action on your part is necessary to assert the limited rights the Bankruptcy Code gives landlords.