How does a tenant bankruptcy affect the tenant’s lease?
ANSWER:
A tenant filing bankruptcy can significantly alter landlord-tenant rights and remedies even if the tenant is current in his rent or not otherwise in violation of his lease.
Once the tenant files for bankruptcy a landlord is prevented from taking any action against the tenant to enforce the landlord’s rights until the bankruptcy is discharged or the automatic stay is lifted.
In a Chapter 7 filing, the debtor turns over control of his assets to the Bankruptcy Trustee. The Trustee administers those assets including the decision to keep the tenant’s lease (assume) or reject (terminate) the tenant’s lease. If the Trustee’s decision is to assume the lease, the landlord may ask the Bankruptcy Court to demand that the tenant prove he has the ability to pay for future rent. In the event that the tenant later defaults on rents the landlord can ask the Court to lift the bankruptcy automatic stay in order to terminate the tenant’s lease and file for eviction as necessary.
Since Chapter 7 bankruptcy cases involve liquidation of property there is usually little or no money available from the debtor’s estate to pay creditors. As a result, in these cases, there are few issues or disputes, and the debtor is normally granted a discharge of most debts without objection. This means that the debtor will no longer be personally liable for repaying the debts.
A landlord’s claim for unpaid rent is in most cases an unsecured claim, which has lowest priority. Accordingly, the landlord’s claim will be grouped with other unsecured creditors. Payment on this group’s claims depends on whether funds remain after secured and priority claims are paid. The percentage of this group’s payments can range from zero to 100 percent of the claim amounts. Landlords may have little chance of collecting money owed for past-due rent and damages unless collected as a condition of lease assumption. For all practical purposes the tenant’s pre-petition debt to the landlord will be discharged.
Chapter 13 of the Bankruptcy Code provides for an adjustment of debts of the individual with regular income. A debtor must develop a plan to repay all or part of his debts over a specified period of time. The Chapter 13 Bankruptcy Trustee evaluates the debtor’s case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
During the repayment period the law protects the debtor by forbidding creditors from starting or continuing collection efforts. Individuals filing Chapter 13 have no direct contact with creditors while under bankruptcy protections.
Under a Chapter 13 filing, the debtor has more control over the decision to keep or reject a lease. The decision to keep or reject a lease must be made before the debtor’s repayment plan is confirmed by the Court. Should the debtor decide to keep his lease, a landlord will usually not be able to terminate the lease and evict the tenant/debtor.