One of the tenants filed bankruptcy, what should I do?

25 Replies

I have a co-tenant leased my property. One of them moved out and filed bankruptcy chapter 7 months ago without noticing, the other one still occupied and been paying monthly rent on-time.

Should I terminate the lease and create a new one with the remaining tenant or just keep the current one until it expired?

I personally would just keep the one you have until it expires and then in order for him/her to renew he/she would have to pass my tenant income qualifications. Tip: If you go this route let the tenant know well in advance so that if he/she won't meet your criteria he/she will have time to find another place to live.

For your own protection I would advise drafting a new M2M lease with this tenant to allow you to easily terminate on short notice if required. Your tenant may ask to have a replacement co-tenant which you will also need to screen.

Your situation is why a landlord must initially screen each tenant to insure that in the event either is left as a sole tenant they qualify and are able to afford the rent as outlined in your screening process.  If your screening requires a tenant earns 3X rent then each tenant must qualify. Usually when one leaves they must both leave. Same may apply in the case of married tenants. Remember when they split up you may be left with a single unqualified tenant.

You don't really have the unilateral right to do this, and I see no advantage.  The current tenant is still liable, and is making payments.....no problem to solve.

Thanks all for the input. I will keep the lease as is and inform the current tenant 

Both tenants are still responsible, even if one vacated.

What's required to get the bankrupt tenant that already left off the lease, is his signature, and roommates signature that says they agree, and you agree, to take him off the lease, but your not required to do that.

It's called roommate termination agreement. and I'd do that.

Then sign a new lease with current tenant and maybe he'll extend it.

If not, Going forward for renewal, you would still need to know tenant bankrupt is gone, you could accept renewal with good tenant only. but get the guy signed off the lease.

Security deposit stays on unit even if one moves out, and you return the deposit to tenant(s) remaining as listed on lease. so your required to divide it so let current guy know , or he's going to challenge you come move out. 

Here is another issue guys:

I found out that she had filed bankruptcy in Phoenix, AZ around March of this year, apparently she moved out prior that without letting me know. So now I just received a letter from the trustee in Phoenix, demanding me to remit the security deposit to the trustee. 

Several bankruptcy attorneys that I called gave me different advises, some told me to contact local Landlord and Tenant attorney, some told me to contact bankruptcy attorney in Phoenix. 

Anybody here have ever experienced the same situation? Under the Texas law, what's the tenant rights over the deposit? According to the lease agreement, the deposit is refunded at the end of the lease. Much appreciated any advice from y'all.. !!! 

Time to call your lawyer. Don't want to bite the automatic stay. Good luck.

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Make that "violate the automatic stay."

Originally posted by @Al Wilson :

Make that "violate the automatic stay."

 Isn't the automatic stay to benefit one who files bankruptcy and to prevent the creditor which is myself to collecting payments or debts? My case is the other way around.

Originally posted by @Jason Vo :

Here is another issue guys:

I found out that she had filed bankruptcy in Phoenix, AZ around March of this year, apparently she moved out prior that without letting me know. So now I just received a letter from the trustee in Phoenix, demanding me to remit the security deposit to the trustee. 

Several bankruptcy attorneys that I called gave me different advises, some told me to contact local Landlord and Tenant attorney, some told me to contact bankruptcy attorney in Phoenix. 

Anybody here have ever experienced the same situation? Under the Texas law, what's the tenant rights over the deposit? According to the lease agreement, the deposit is refunded at the end of the lease. Much appreciated any advice from y'all.. !!! 

 If you remitted the deposit, you open up yourself to a potential claim from the tenant who continues to reside in the unit.  The deposit is for the security for a lease with Tenant A and Tenant B .  Tenant A should not even be entitles to 1/2 short of an agreement between both tenants and the landlord.  With a lease and for that matter any contract :

"And" instead of "Or" means something.  Both are 100% responsible for the lease and both have a claim to 100% of any deposit refund.  This is why in Texas deposit refunds should be sent to all tenants on one check.  This is an interesting question and I would like to know how it turns out

Originally posted by @Greg H. :
Originally posted by @Jason Vo:

Here is another issue guys:

I found out that she had filed bankruptcy in Phoenix, AZ around March of this year, apparently she moved out prior that without letting me know. So now I just received a letter from the trustee in Phoenix, demanding me to remit the security deposit to the trustee. 

Several bankruptcy attorneys that I called gave me different advises, some told me to contact local Landlord and Tenant attorney, some told me to contact bankruptcy attorney in Phoenix. 

Anybody here have ever experienced the same situation? Under the Texas law, what's the tenant rights over the deposit? According to the lease agreement, the deposit is refunded at the end of the lease. Much appreciated any advice from y'all.. !!! 

 If you remitted the deposit, you open up yourself to a potential claim from the tenant who continues to reside in the unit.  The deposit is for the security for a lease with Tenant A and Tenant B .  Tenant A should not even be entitles to 1/2 short of an agreement between both tenants and the landlord.  With a lease and for that matter any contract :

"And" instead of "Or" means something.  Both are 100% responsible for the lease and both have a claim to 100% of any deposit refund.  This is why in Texas deposit refunds should be sent to all tenants on one check.  This is an interesting question and I would like to know how it turns out

Greg, that is exactly what I thought since I would keep the current lease agreement until it's expired. 

The funny thing is that I tried to contact some Real Estate attorneys, they told me that I need to consult with Bankruptcy attorneys, so I called them and again they told me to get with Real Estate attorneys... And I'm not sure if I might need to have a lawyer in Phoenix who could represent me since the case is filed over there. I have about 10 days left to response to the trustee. 

@Jason Vo

I would convey my concerns with the Trustee before incurring any legal costs.  How does the other tenant feel about the situation ?  With agreement from all, you could release the tenant

Originally posted by @Greg H. :

@Jason Vo

I would convey my concerns with the Trustee before incurring any legal costs.  How does the other tenant feel about the situation ?  With agreement from all, you could release the tenant

 Greg,

No, not yet. I plan to discuss this with the remaining tenant after knowing what direction should I take to clear this legal issue. So far, none of the attorneys were able to give me a definite advice just yet, but bouncing me back and forth. 

You mentioned to contact the trustee which I think it makes sense, never thought about it as I think I should have an attorney to represent me. I will try to contact them today. 

Originally posted by @Jason Vo :

Here is another issue guys:

I found out that she had filed bankruptcy in Phoenix, AZ around March of this year, apparently she moved out prior that without letting me know. So now I just received a letter from the trustee in Phoenix, demanding me to remit the security deposit to the trustee. 

Several bankruptcy attorneys that I called gave me different advises, some told me to contact local Landlord and Tenant attorney, some told me to contact bankruptcy attorney in Phoenix. 

Anybody here have ever experienced the same situation? Under the Texas law, what's the tenant rights over the deposit? According to the lease agreement, the deposit is refunded at the end of the lease. Much appreciated any advice from y'all.. !!! 

  You will need to speak with a bankruptcy attorney that is familiar with rental leases.  Some jurisdictions have ruled that a Trustee can not recover a security deposit because it is being held in trust to secure the lease and is not an asset of the bankruptcy estate.  Because she has moved out this may or may not be the case in your situation.  You have another wrinkle because the co-tenant is still in the property. 

If you do not get it worked out the Trustee, he may file an action to force you to turn the over the deposit.  This may or may not be worth the expense of litigating over the deposit.     

Good Luck,

Jesse 

This post is not intended to give any legal advise or create an attorney client relationship.  Please consult with an attorney about your particular situation and your states laws. 

How much is the security deposit ?

How much is an attorney going to cost you ?

You could do a walk thru today, and determine what security deposit value  is minus cleaning / damages would be. 

Then

Get the trustee that want's the security deposit back to have his bankrupt client sign they vacated the unit,and current tenant sign that they acknowledge also, and they agree for security deposit to be sent to bankrupt tenant.  and have they no further claims against you, upon you return of the deposit to them per your walkout dated day of walk thru. 

You could keep the remainder tenant and ask for new security deposit on a payment plan. and sign her on M2M term or non-renew her. either way  you can still bill for her now for damages she would cause after she moves out, 

Just don't spend all you security deposit you have on file now with an attorney, it's not worth it.

Originally posted by @Deanna McCormick :

How much is the security deposit ? - $2600.00 (2 years lease, one year remains)

How much is an attorney going to cost you ? - I'm still trying to find out as of this point.

Good your doing the math, and checking it out further

So basically your in for 1/2 of deposit to the bankrupt tenant, (or are they demanding whole deposit), with 2 on the lease they'd only be able to get 50% . the balance could stay on with current remaining tenant. 

So $1300.00 less $150. to 250.00 an hour for first hour for attorney, off that, for first phone call,and then your down to about $1000.00 

@Deanna McCormick

Taking your advice creates many more issues for the landlord and solves none

-The lease cannot be modified unless all parties are in agreement including the tenant that vacated

- The remaining tenant also has an undivided interest in the deposit . The remaining tenant could/should have a winnable action against the landlord if he were to require a new deposit.  Again, a valid lease is in place

-You cannot bill and deduct from a tenants deposit while the lease is still in effect. You can bill for a damages

@Greg H.

In previous above post I recommended a roommate termination, between all parties,

This would permit landlord to:

1. write an new lease with remaining tenant if he chooses as per terms he wants. 

2, This gets rid of the bankrupt tenant for all parties, if they all can agree to do it. It makes sense and works usually, 

3. This permits landlord to settle deposit on first lease. settle that account as closed.and send the bankrupt guy is portion. Do a walk thru and adjust per damages if any.

4 . This permits landlord to transfer balance of security deposit to current remaining roommate account,, and money stays on her account for her new lease.

5. We did it all the time,, for roommate off lease agreement. 

6 the landlord may have not originally agreed roommate termination, prior, but the bankrupt guy is gone so get it back in order. Make current tenant responsible for everything with a new lease, if she chooses to add a roommate in future it's with landlords approval with proper application screening.

That the bankrupt tenant is asking for their deposit is not a surprise. 

@Deanna McCormick

The vast majority of leases in Texas are Texas Association of Realtor leases or Texas Apartment Assoc leases or are based on their terms

The lease reads Tenant A and Tenant B- both tenants are 100% responsible for the rent during the lease and not 50% each

Tenant A and Tenant B both have an undivided interest in the deposit and not 50/50. And deposit refund should always be sent payable to Tenant A and Tenant B unless prior agreement is made in writing

Any deficiency whether it is damages or unpaid rent after lease termination is 100% the responsibility of Tenant A and Tenant B and not 50/50

Not modification to the agreement can be made with the agreement of all parties. Tenant A(Bankruptcy) has zero incentive to cooperate as their debts are going to be discharged and deposit will be applied to their debt.  Maybe they will do the right thing and cooperate.  

The Trustee is asking for 100% of the deposit and not 50%. If the landlord gives up the deposit, when Tenant B moves out they will expect and rightly so to have the deposit refunded minus any deductions.  This is where I see a potential issue for the landlord. There is a potential here to have to refund the deposit to both.  An Agressive Trustee might push for the deposit as well as Tenant B pushing as well

Additionally in Texas we do not have to have accounts for Tenant deposits. We can actually do anything we want with the money.   We need to account for the $$ within 30 days of moveout but other than that we do not

You could contact the trustee and inform them the lease is still ongoing. Most trustees are reasonable and they probably don't know there is another party (your current tenant) involved. After you call them, send them a letter stating the same. There are a lot of reasons why it may or may not be included in the bankruptcy estate- which is why the attorneys are passing you back and forth. These things are very fact dependent/ local- state law dependent and rarely litigated. It's usually not worth it for anyone. You are obviously encouraged to hire a lawyer if you want/need to.

At a minimum, you may drop the value of the bankruptcy estate below the lowest amount the trustee will seek to recover by bringing the current tenant's interest in. If this is the only recoverable asset in the case, cutting it in half may make it not worth going after. (In the districts I practice in, the line is around $2k.) you should check with your current tenant and see who they think the deposit belongs to (I.e. Who paid it?). Their testimony will matter and they will have a big problem if you give their money away.

There are some trustees who try to bluff anyone they can into paying questionable assets into the estate. This can be easy money for them. It is cash in your account that takes one letter to get. You might call your former tenant's attorney and see if they can give you insight into what kind of trustee you are dealing with.

I am not giving specific advice other than to contact more people and get more info. I am not licensed in your area or trying to give legal advice. Good luck !

hello all, 

I'm finally coming to an end of this mess.. :) , and so I think I should update you guys on what is happening, and for future reference if any of you or your fellows might encounter the same thing. 

First I contacted the attorney who represented the bankrupt tenant (tenant A), he said that once the tenant A filed bankruptcy, the lease would be automatically rejected, which mean I could proceed any further steps without tenant A's consents.  

I then contacted the trustee's attorney and explained that they're only entitled to half of the deposit due to this is co-tenancy, and subject to repair costs for any damages to the house, which I only need to pay them $800 after repair cost deduction. And they accepted it. 

I also spoke to the remainder tenant about the situation, and he agreed to sign the lease amendment.

So now I'm waiting for their agreement to be sent over for signature and then I will be done. 

Anyway, much appreciated for all of your inputs and comments above. 

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