The Resident In Bankruptcy

by Brian P. Wolk, Attorney at Law

Heist Weisse & Davis, P.A.

For many property managers, the eviction process is a source of great frustration. Managers must be patient, as budget cuts have slowed down the court system and the sheriffs’ civil process divisions. In addition, the property manager may be dealing with a resident who is contesting the eviction, causing hearings to be scheduled by the judge. Meanwhile, the property manager’s account receivable balances grow. This eviction process becomes even more complicated when a resident near or in the eviction process files for bankruptcy. Therefore, it is crucial at this stage to immediately consult with an eviction attorney. Although this may be a stressful time, as the bankruptcy process will be uncharted territory for many property managers, if you follow the advice of your eviction attorney, in most cases the resident will still be successfully evicted. One key point to remember is that once the resident files for bankruptcy, the property manager is prohibited under federal law from undertaking any collection or possession activity without first obtaining permission from the Bankruptcy Court, or the property manager will risk substantial penalties and liability.

The Chapter 7 Bankruptcy

In most cases, the resident who files for personal bankruptcy chooses what is referred to a Chapter 7 petition. It is also called liquidation. The resident’s assets are liquidated to satisfy his debts. The resident in this case has typically racked up insurmountable debt and is seeking to discharge it. The debts are usually discharged in less than five months from the time of the bankruptcy petition being filed. The vast majority of creditors, including the landlord, will not be able to collect any monies owed, except for the amount of the security deposit retained, a fund already in the landlord’s possession. Unless the debt has arisen from a bad act, a family court ordered obligation or a tax, the resident will likely have the debts discharged in full. There is some good news; the law provides a mechanism that allows the property manager to evict a nonpaying resident who files a Chapter 7 petition, if approval is obtained from the Bankruptcy Court, without having to wait for the bankruptcy case to be completed in full.

The Chapter 13 Bankruptcy

The law also authorizes the property manager to evict the resident with bankruptcy court approval who has filed a Chapter 13 petition without having to wait for the bankruptcy action to be completed in full. The Chapter 13 petition differs from the Chapter 7 petition, because it is not liquidation. Rather, a payment plan is created so the resident can attempt to catch up on payment obligations. The resident must be a wage earner, and the payment plan typically lasts for three to five years and is administered and monitored by a Chapter 13 Trustee who is employed by the Bankruptcy Court. In rare instances, individual residents elect to file a Chapter 11 petition, and it is very similar to a Chapter 13 petition in many respects, except that the debts might be more substantial.

Notification of the bankruptcy

The property manager usually learns that the resident has filed for bankruptcy protection because the resident has verbally indicated this, the property manager has received a written suggestion of bankruptcy from the resident’s attorney, or the property manager has received official notification from the Bankruptcy Court. In all cases, because the stakes are high, you should notify your eviction attorney immediately. When a resident files for bankruptcy under any chapter of the Bankruptcy Code, all creditors, including the landlord or property management company, if listed on the petition, should receive directly from the Bankruptcy Court a notice that the bankruptcy process has been initiated. That document is called a notice of commencement. All bankruptcy filings are public record, so if you have not received a notice of commencement from the Bankruptcy Court, you or your attorney should be able to confirm fairly quickly whether your resident is or is not in bankruptcy.

Automatic Stay

Once the resident has filed for bankruptcy, all rent collection efforts must be halted, and in most cases there will be an automatic stay on the eviction under federal law. Essentially this means that bankruptcy law has put a stop to all rent collection actions, and in most cases eviction actions for possession of the premises. The automatic stay remains in effect until the dismissal of the bankruptcy case, the entry of a discharge, or an order for relief from the Bankruptcy Court. If the resident has filed bankruptcy and is not voluntarily paying the rent, then it is often not in the property manager’s best interest to wait until the case is dismissed or discharged. In this situation, the landlord’s best option may be to have an attorney obtain an order for relief from the Bankruptcy Court.

Relief from the Bankruptcy Court

In order to obtain relief from the Bankruptcy Court, a motion to obtain relief from the automatic stay must be filed with the Bankruptcy Court. The process of obtaining relief from the Bankruptcy Court generally takes 25-40 days in a Chapter 7 petition, if the resident does not contest the relief request. The time period is often longer with regard to a Chapter 13 petition, since a preliminary hearing will usually be required in a Chapter 13 case. The time required to obtain relief will be greater in a Chapter 7 case if a preliminary hearing is required, particularly if a final hearing is scheduled, or if the resident pays rent under an adequate protection order reached at the preliminary hearing, which is uncommon. Not all attorneys licensed in Florida can practice in Federal Bankruptcy Court. The attorney that files the motion to obtain relief from the automatic stay must be admitted to practice in the Bankruptcy Court in the federal district where the bankruptcy petition was filed.

Is relief from the Bankruptcy Court always necessary?

If the resident continues to voluntarily pay the rent, the landlord will probably not need to file a relief motion, unless the landlord wants to pursue some other lease noncompliance unrelated to rent payment. If a rental agreement is signed after the bankruptcy petition was filed, the automatic stay technically does not apply; however, a renewal lease may be covered by the automatic stay. If the resident files the bankruptcy petition on a date after the final judgment for possession is signed by the county judge, then the automatic stay is technically not in force. Therefore, the timing of when the bankruptcy petition is filed can have a major effect on how the property manager deals with the bankruptcy. The automatic stay on all rent collection efforts and on the eviction action will apply to all other scenarios if there has been no final judgment at the time the bankruptcy petition was filed. If the resident files the petition before a Three Day Notice is delivered, then the landlord is prohibited from serving that notice unless the automatic stay is lifted. Likewise, if the resident is served with a Three Day Notice and the landlord subsequently files an eviction, there will still be an automatic stay imposed if the resident files the petition prior to the final judgment of eviction being signed.

Liability if Federal Bankruptcy Automatic Stay Provisions are not complied with by the Property Manager

There will be serious consequences if the landlord or property manager fails to adhere to the automatic stay on all rent collection actions or if applicable, the stay on the eviction action. First, the action would be void, and if the eviction were completed, it would be deemed to be illegal and the resident would be entitled to regain possession of the premises. The property manager and landlord could be sued for actual damages, punitive damages, attorney’s fees and court costs. In addition, the landlord and property manager could be held to be in contempt of court, since the automatic stay is a court order which authorizes the court to impose substantial fines.

Scrutinize applicants who have filed bankruptcy petitions