Lease Cancellation because of Bankruptcy
Nashville, TN · Member since 2017 · 10 posts · 9 votes
So I have a unique situation. I own a rental in Nashville, Tennessee. An individual from Texas who is moving here has applied, and I approved them. They had a lower credit score. So I've obtained July and August rent in advance, and secured a larger deposit than normal. We've signed a lease, and it begins on July 1, 2018. I just mailed him the key Monday, and within 3 hours of informing him, he tells that he has declared bankruptcy but would still like to rent the place and intends to pay. I would like to cancel the lease as this changes his credit worthiness. He has not yet taken possession, and the lease has not started. Does anybody know if I'm allowed to simply cancel the lease before it begins and return the deposit/rent?
Michael
Not sure what your state laws indicate, but here in North Carolina our State Bar Association approved forms have it built in to the lease agreement if the tenant files for Bankruptcy, the Landlord has the option to immediately terminate tenancy. I would definitely consult an attorney regarding your state rental laws. If this is allowed, there may be a stipulation that you have to terminate within a certain period of time. Also, if he did lie on his application, this may be grounds for termination of the lease as well.
You may be able to have the deposit forfeited upon termination of the lease agreement. Typically rent is not earned until the month it is due, so should be retained in a prepaid account, and/or accounted for as unearned revenue until the month it is earned. Now if you are not able to secure a new tenant until after the current lease starts you may be able to charge rent until a new lease starts. Again as things differ from state to state, I would definitely consult a local attorney.
@Michael Meade. Check your Lease to see if it says anything about changes in credit worthiness.
My guess - it doesn't! I would contend to you his credit probably hasn't changed, and as you have additional deposit, this should probably carry you through to see if he intends to fulfill his side of the bargain.
Not speaking as an attorney (which I'm not, nor want to be) I personally would certify-return receipt mail his money back, immediately change the locks, and issue a cancellation of lease.
If this person pulls this kind of stuff at the get-go, you believe he will change his ways after move in?
My understanding of the law is that a bankruptcy filing can stop all collection procedures, at least temporarily, and that would include eviction for non-payment.
You have a signed agreement with the rent and deposit. This is legally binding and I would not act to terminate as some have suggested without legal counsel. I have never read a lease which would allow you terminate
Most likely you are also going to be named as a creditor in the bankruptcy. The court may ask you to forward any deposits and rent could be part of a repayment plan. This is a potential mess
I would call and ask if he is willing to part ways for the return of all money
Not sure what your state laws indicate, but here in North Carolina our State Bar Association approved forms have it built in to the lease agreement if the tenant files for Bankruptcy, the Landlord has the option to immediately terminate tenancy. I would definitely consult an attorney regarding your state rental laws. If this is allowed, there may be a stipulation that you have to terminate within a certain period of time. Also, if he did lie on his application, this may be grounds for termination of the lease as well.
You may be able to have the deposit forfeited upon termination of the lease agreement. Typically rent is not earned until the month it is due, so should be retained in a prepaid account, and/or accounted for as unearned revenue until the month it is earned. Now if you are not able to secure a new tenant until after the current lease starts you may be able to charge rent until a new lease starts. Again as things differ from state to state, I would definitely consult a local attorney.
As others have stated the laws likely vary from state to state. The most knowledgeable response would be from an attorney familiar with the rental laws in your area.
Our lease agreement basically indicates conditions for immediate lease termination (immediate is within the law). One of our conditions is bankruptcy.
We also have conditions for
The toughest part is finding out that they no longer meet one of these conditions.
At least your tenant told you about it. Unfortunately for the tenant, if he were my new tenant the only thing being honest would get him in this case is that I would think he was honest in his dealings with me. Unfortunately, honesty does not pay the rent. As such his lease would be terminated.
Thanks for the comments everyone. I'm seeking legal advise now about what my options are. I'll let you all know how it all turns out.
I may be the lone voice here (and I am in no way a lawyer or legal scholar, so take it for a grain of salt) I recommend getting qualified counsel in your area who specializes in Bankruptcy and landlord law.
If he has already filed I would guess you are not named in his petition at all. I would figure he has his house listed (hence needing a place to go), his car, his credit card bills etc. Since he let you know 3 hours after sending him the key and he has filed, you most likely are not listed on anything. You are not a creditor who is seeking a portion of the funds. He has to have a place to stay in the eyes of the court, so it's not like they are going to pull his funds from you and kick him out on the street.
That all being the case, he can't file again for 7 years. So if he does end up owing you anything and you get a judgement, he can't just wipe it out with a bankruptcy. So he is in essence a better risk than someone who had a lower score and not just filed bankruptcy.
Just my 2 cents and good luck in whatever you decide.
(EDIT: Also his debt to income ratio is going to improve by quite a bit without having to pay everyone else)
So I have a unique situation. I own a rental in Nashville, Tennessee. An individual from Texas who is moving here has applied, and I approved them. They had a lower credit score. So I've obtained July and August rent in advance, and secured a larger deposit than normal. We've signed a lease, and it begins on July 1, 2018. I just mailed him the key Monday, and within 3 hours of informing him, he tells that he has declared bankruptcy but would still like to rent the place and intends to pay. I would like to cancel the lease as this changes his credit worthiness. He has not yet taken possession, and the lease has not started. Does anybody know if I'm allowed to simply cancel the lease before it begins and return the deposit/rent?
Michael
ITs not legal advice, and I don't know what your specific state laws say, but I would scour your lease application to see if he lied about anything. For instance did he file for bankruptcy before he applied submitted a lease application? If so, I would see if it was legal to cancel the lease.
I suspect that you are inheriting a professional tenant. and would do everything possible to push them out the door if possible. (legally)
@Michael Meade Do NOTHING without talking to a lawyer. I do not believe you know if you have been named in the bankruptcy or not. I doubt you have but if you have I would be a huge mistake to attempt to cancel the lease because he told you about the bankruptcy.
If you attempt to cancel the lease without a lawyer I would expect his lawyer to add you to the bankruptcy case and then notify the judge of what you did. I would be afraid he could then have the locks changed on your house and move in. Once you personally come to Texas to bankruptcy court a couple of times you might get the judge to allow you to start an eviction process if the tenant has not been paying.
If you are not named in the bankruptcy and the person falls behind immediately file for eviction.
A bankruptcy trustee has the power to unwind transactions within 3-months of the BK filing and bring in funds back into the BK estate. Only those who fail to understand the BK process would be intimidated by a tenant filing BK. There may be a delay to start, but all other payments are mandated by the court and paid by the trustee - better than gold. Payments for shelter get put high on the list of creditors (and that is what landlords are). If a payment is missed, notify the court/trustee. No eviction without permission of the court, though.
(only licensed in Texas and SDTX)