Once you receive notice from a tenant that he or she has filed for bankruptcy, you are prohibited by federal law to take certain actions. You are not allowed to attempt to collect the rent owed to you or seek possession of the rental premises without first obtaining permission from the Bankruptcy Court. If you had already served the tenant a Three Day Notice, you cannot file an eviction. If you had already served a Three Day Notice and filed an eviction, the eviction comes to a screeching halt. However, bankruptcy law was amended in 2005 to allow a landlord to continue with the eviction process without having to seek standard stay relief (see below), if a final judgment of eviction was entered prior to the date the tenant filed the bankruptcy petition. However, there are a number of nuances to this law, and either the Bankruptcy Clerk has to send notice indicating that the stay is not in effect concerning the eviction, or the landlord must obtain an order from the Bankruptcy Judge confirming that no stay is in effect regarding the eviction. Any time you give a tenant a break or voluntarily delay finishing up an eviction, you run the risk of the tenant filing bankruptcy. If you violate the bankruptcy laws and attempt to continue to collect the debt or regain the rental premises, you could incur serious penalties and sanctions. Is all hope lost?
Immediately upon receiving a written suggestion of bankruptcy, or even if the tenant verbally tells you that he or she has filed bankruptcy, you should immediately call your attorney, who will check with the Federal Bankruptcy Court to see if a bankruptcy has indeed been filed. If it is verified that a bankruptcy has been filed, and the tenant is not voluntarily paying the rent, your attorney can prepare a motion to obtain relief from the automatic stay created under bankruptcy law. Since the bankruptcy filing "stays" or "stops" everything, you must petition the bankruptcy court to allow the "stay" to be lifted for the purposes of collecting your debt or continuing to pursue your eviction. The procedure of petitioning the bankruptcy court to successfully lift the stay will typically take 30-45 days with regard to a Chapter 7 petition. After sweeping changes were made to bankruptcy law in 2005, attempting to obtain relief from the stay in a Chapter 13 petition could cause bigger delay.
The most common bankruptcy filing you will encounter is a Chapter 7 petition. This is also called a "liquidation" and often occurs when a tenant has mounting credit card debt, car payments, hospital bills, etc., and just cannot get out of the proverbial debt trap. Most of the creditors, including you, will probably never see a dime of money once the bankruptcy is completed, but thankfully, the law has carved out a niche that at least allows you to prevent the tenant from living on the premises until the bankruptcy is completed. A typical Chapter 7 bankruptcy petition takes a few months to be completed, but a swift call to your attorney the moment you receive the dreaded "suggestion of bankruptcy" will usually result in about a month's delay in removal of the tenant, in addition to the normal eviction timetable. However, some tenants who file a Chapter 7 petition will continue to voluntarily pay the rent, and the landlord does not have to take any action in that case. A landlord is not required to sign a renewal lease with a tenant in bankruptcy, but will need to seek permission from the Bankruptcy Court before sending a non-renewal notice to a tenant under an active bankruptcy case.
The tenant in bankruptcy can often buy more time when a Chapter 13 debt reorganization is filed, or in the rare event you rent to a corporation which subsequently files for Chapter 11 business reorganization protection, you could be looking at bigger delays. In a Chapter 13 petition, the tenant may assume the lease and voluntarily pay the rent under the plan submitted with or subsequent to the bankruptcy petition. If the tenant in bankruptcy is not voluntarily paying the rent, and the landlord takes no action in Bankruptcy Court as landlord, horror stories abound, since the tenant can occupy the premises for literally years with no legal recourse. Whether a Chapter 7, 11 or 13 petition is filed, for those tenants who do not voluntarily pay the rent, if the tenant eventually obtains a discharge, the landlord's collection rights will be limited to security deposit retention and the proof of claim filed with the bankruptcy court. The remainder of the tenant's debt will be legally wiped out forever.
Suppose an applicant comes to you, and the credit report shows that the applicant is currently in a bankruptcy proceeding. Should you rent to that person? Technically, the lease with your company would constitute a "post-petition" transaction, and the automatic stay should not protect that tenant. However, it is not that unusual for one petition to be dismissed, only to have the tenant file a subsequent bankruptcy petition, and then the "new stay" will clearly affect the landlord. Even if the tenant is not technically protected under the bankruptcy petition, if the tenant informs the sheriff of the bankruptcy at the end of the eviction, the sheriff will often choose not to make the legal distinction whether the lease transaction is "post-petition", and the landlord will then be required to obtain official confirmation from the Bankruptcy Court before completing the eviction.
Be very leery of applicants who have a history of filing bankruptcy, but who do not actually follow through to the point of discharge, (known as serial filers). That pattern suggests an applicant who has no qualms about living rent free for a few months before moving on to another landlord to share the same treatment. We would also recommend being leery about applicants who have filed bankruptcy multiple times, whether a discharge was obtained or not.
The next time you receive a "suggestion of bankruptcy" on behalf of a tenant or see any information regarding bankruptcy on an application to rent, call your attorney and get some advice. Not all attorneys are admitted to practice before the Bankruptcy Courts in Florida and have to "farm" the bankruptcy proceedings out to another attorney. David Weisse is admitted to practice in the Florida Middle District Bankruptcy Court and can assist you with your legal issues.
Revs'd 11/4/08