The Landlord’s Complete Guide to Tenant Bankruptcy Filings

The Landlord’s Complete Guide to Tenant Bankruptcy Filings

4 min read
Kevin Perk

Kevin Perk is a full-time buy and hold and fix and flip real estate investor with over 15 years of experience. He and his wife Terron operate Kevron Properties, LLC, a boutique real estate investing company in Memphis, Tenn.

Experience
Kevin was a past president and is a current board member of the Memphis Investors Group. He’s also a blogger and writer who has authored hundreds of real estate investing articles on BiggerPockets and his own blog, SmarterLandlording.com, some of which have been featured on The Motley Fool and MONEY: Personal Finance News & Advice.

Kevin is also host of the SmarterLandlording podcast.

Originally from the Washington D.C. area, Kevin moved to Memphis to attend graduate school at The University of Memphis. After receiving his master’s degree in City and Regional Planning, Kevin climbed the planning career ladder to eventually become planning director of a county in the Memphis metro area. He “retired” from planning in 2003 to pursue real estate investing full-time.

Since “retiring,” Kevin’s main real estate investment strategy has been to buy and hold, otherwise known as landlording. Generally working in historic Midtown Memphis, Kevin is also known to fix and flip grand, historic homes when the right opportunity presents itself. He and his wife Terron (who is the principal broker at Perk Realty) have participated in dozens of real estate transactions in the Memphis metro area.

Kevin has the heart of a teacher and believes in helping others through education. An instructor of college-level geography for over 25 years, Kevin also regularly participates in seminars and panel discussions at such forums as the Memphis Investor’s Group and the Single-Family Rental Summit.

In addition, Kevin has been interviewed in publications such as the Memphis Commercial Appeal, the Memphis Daily News, and the Foreclosure News Report.

Education
Kevin earned a master’s in City and Regional Planning from The University of Memphis.

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I live and work in one of the Chapter 13 Bankruptcy capitals of the United States, Memphis, TN. Only the Atlanta and Chicago areas had more Chapter 13 filings than Memphis in 2014. Memphis has held this distinction for many years. No one really knows or has been able to fully explain why Memphis has this dubious distinction; it just seems to be a fact of life here.

Memphis is also a city of renters. Large portions of the population live in rental housing. Yes, that makes Memphis a strong rental market and attractive to investors from all over the world. But it also means that many of those people filing for bankruptcy here will be tenants.

How Does a Tenant Bankruptcy Filing Affect the Landlord?

To figure that out, let’s start when a tenant gets behind on the rent.

It can be very easy for some tenants to get behind very quickly. Many people are only one paycheck away from financial hardship. An illness, car breakdown or just a series of bad decisions can create the tough choice between paying the rent or putting food on the table.

When tenants get behind on the rent, some landlords are very quick to pull the eviction trigger. They or their attorney will rush down to the courthouse to file for the FED warrant. While it is true that you do have to demonstrate to your tenants that you will not mess around, being too quick to pull the eviction trigger may just backfire on you, as we will see.

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What Happens During An Eviction

When you file to evict your tenant, that filing becomes public record. Anyone can go down to the courthouse (or just go online) and look up the recent filings. Many real estate investors are already aware of this as they look up filings for foreclosures or tax sales for their particular marketing programs. Bankruptcy attorneys do the same thing with eviction filings.

Related: Your Complete Guide to Effectively Handling Tenant Evictions

Bankruptcy attorneys will soon be flooding the mailbox of your tenant with all kinds of solicitations. Those postcards and letters will say things like, “We can stop your eviction,” or “Stay in your home” and “Stop those harassing landlord calls.” It can all be very enticing to a tenant who has gotten behind. Some will see no other way out and will be convinced that filing for bankruptcy makes sense for them. If they do, your job as a landlord just became much more difficult.

Chapter 7 and Chapter 13 Bankruptcies

Personal (as opposed to business) bankruptcies generally come in two forms, Chapter 7 and Chapter 13.

A chapter 7 bankruptcy is a filing that is asking for many debts to be simply wiped away and forgiven. The standards for filing and getting a Chapter 7 approved are more complex and daunting, so most will file a Chapter 13. Chapter 13 is also called a wage earner plan, and it seeks to restructure debts into something “manageable” that the person filing it can pay. Most creditors will likely get something out of a Chapter 13 filing, while a Chapter 7 filing could wipe any monies owed away.

Recap

So let’s recap.

Your tenant got behind on the rent for whatever reason. You file for eviction. A bankruptcy attorney sends a letter, and your tenant decides to file a chapter 13 bankruptcy.

What does that mean to you? First and foremost, your eviction proceeding is halted. Yep, you are dead in the water. Why? An eviction is filed in a state court. A bankruptcy is filed in a federal court. Federal courts trump state courts. Thus, an automatic “stay” is put in place against your eviction proceeding. A local judge will not even hear the eviction case until an okay is granted from the bankruptcy court.

Secondly, your tenant gets to stay in the property. Furthermore, they do not have to pay you rent until they get the okay from the bankruptcy court.

Thirdly, you cannot attempt to collect any monies owned to you. You cannot call them. You cannot go knock on their door. You cannot text or e-mail them. You are now considered a creditor by the bankruptcy court, just like Visa or MasterCard, and you must stop trying to collect the debt or face contempt of federal court.

Related: Considering Accepting Money after the Eviction? Beware!

In effect, your tenant has bought some time. They get time to keep living in your property without paying you rent. Yes, you can often get the stay against your case lifted, but you will definitely need the services of an attorney familiar with bankruptcy court procedures. So after 3, 4, or 6 months—and hundreds if not thousands of dollars in extra legal fees and lost rents—you may finally get your property back.

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What Are the Right Steps to Take?

What should you have done?

You should have tried your best to work out some kind of deal before you file for eviction and the tenant files for bankruptcy. Remember, filing for eviction triggers all of those letters and postcards offering the tenant a way out. If they choose to take that step and file bankruptcy, you are going to be out of a lot more and in a much worse position than you are today.

All of this is just another reason why I feel filing for eviction is an absolute last resort. Yes, I understand that sometimes it just has to be done. No, the tenant will not always file for bankruptcy, but the option will definitely be presented to them. So do your best to work out a deal on the front end. In my mind, it is better to lose a little up front and get possession of the property back rather than lose a lot more money and time down the road just to end up in the same place.

[Editor’s Note: We are republishing this article to help out our newer members.]

Do you have any tenant bankruptcy stories you would like to share?

Please do so with your comments below!

How does a tenant bankruptcy affect their contract with a landlord? Find out how to handle this sticky situation—and how to avoid it in the first place.