Applicant with a bankruptcy - what to do?

19 Replies

Our minimum qualifications for our 4-bedroom rental home lists, among other things, "Applicant must exhibit a responsible financial life. Credit score must be a minimum of 600." Three adults submitted applications to live together in the house (husband, wife and parent of the wife...let's call her Jane.) Husband and wife meet all qualification standards. Jane meets 600 credit score but has a 2016 Chapter 7 bankruptcy and contributes to the income through Social Security. Husband makes bulk of the income but Jane's contribution is necessary to meet minimum qualification of monthly income that is 3X the rent.  Also, the wife's income is SS-Disability but this does not disqualify her. Do we move on to the next applicant? Thanks for any advice.

Natalie Landry

    Hey Natalie,

    I'm not an expert in this field of law, but if you wrote in the contract, "Applicant must exhibit a responsible financial life," then I would think it's up to you to decide if they meet the qualifications.

    Having filed for bankruptcy, I would not consider that a responsible financial life. However, laws are funny. I might contact a lawyer to see if they can help you for a small fee. Up to you!

    Thanks!

    @Natalie Landry - I wouldn't disqualify just on a Chapter 7 filing, especially since her income is SS.

    Carol C.

      Here's my own personal thoughts on applicants with prior bankruptcies, others may have differing opinions.  I don't mind applicants who have had bankruptcies as long as they've already been discharged. 

      The way I look at it, they likely had most/all of their debt wiped out via the bankruptcy, which should leave them more money to pay rent than they had before the bankruptcy. 

      Secondly, your applicants who haven't filed for bankruptcy could potentially file for bankruptcy at any time.  However, someone who recently had a discharged Chapter 7 bankruptcy, can't file for Chapter 7 again for 8 years (after the first filing date).  (Note: They could file a different type of bankruptcy, like Chapter 13, sooner than 8 years, but even then they'd have to wait at least 4 years.)

      Bottom line is that I wouldn't rule them out completely.  They could end up being good tenants if they check out in every other way. 

      The husband does not qualify for 3X income to rent. This is a easy decision, pass.

      Several scenarios possible that makes this a easy decision to pass..... mother dies or husband leaves.

      You should also raise your minimum credit score. 600 is way too low placing you only one point above financially irresponsible territory. You should not be going below 650 if you want to get any reliable level of financially responsible applicants.

      @Kyle J. Thanks for your insights. What do you mean by "bankruptcies being discharged."? 

      Natalie Landry

        @Thomas S. I appreciate your thoughts. I did have the thought about the Mother dying (but not the husband leaving). How difficult is it for you to find applicants with credit scores >650? Thanks.

        Natalie Landry

          The way I look at it, mom's income is from Social Security, so that's safe. Wife's income is from Social Security disability, so that's safe. In other words, the government can't come in and say "your fired". If the husband was a good job history, it's a go.

          Some years back, I had a few people vying for one of my apartments. It was down to two young guys and a couple and a parent with the same situation as yours. One of the young guys finished his MBA a years or 2 before, had an investment banker job with Morgan Stanley. His roommate worked in the United Nations. Two good jobs, two good incomes, so I went with them.

          A year and a half went by, the UN roommate moved out replaced by a waiter, I said OK, the income still looks good. A few months later, Morgan Stanley downsized, so his outsized salary is now out. He left, and the other roommate, the waiter, got his friend in. I didn't check this guy out, turned out he only delivers papers in the morning. They couldn't pay the rent, and was evicted.

          To top it all off, a year after they left, the IRS called me skip tracing the guy working at Morgan Stanley. They asked me "do you know where he went"? I said "oh yeh, he went back to Indonesia, I hear his dad I a tycoon there, so he's OK". Then a moment of silence, the IRS guy said "sh*t, looks like we're screwed".

          I remember it to this day, and I get a chuckle every time I think about it.

          After that, I don't rent to roommates anymore, I rent to family units. And if they collect any government benefits, I rarely had a case where they came back and say "I don't get it anymore". But people losing their jobs, laid off, quite a few times.

          As to bankruptcy, I rented to a total of 3 tenant who filed over the years. One turned out to be my best tenant. Another skipped out on a month's rent at the end. Not too bad. The third I evicted, he filed bankruptcy, but 2 years after bankruptcy when he's under no obligation, paid me most of his back rent of $6,000.00

          Originally posted by @Natalie Landry :

          Our minimum qualifications for our 4-bedroom rental home lists, among other things, "Applicant must exhibit a responsible financial life. Credit score must be a minimum of 600." Three adults submitted applications to live together in the house (husband, wife and parent of the wife...let's call her Jane.) Husband and wife meet all qualification standards. Jane meets 600 credit score but has a 2016 Chapter 7 bankruptcy and contributes to the income through Social Security. Husband makes bulk of the income but Jane's contribution is necessary to meet minimum qualification of monthly income that is 3X the rent.  Also, the wife's income is SS-Disability but this does not disqualify her. Do we move on to the next applicant? Thanks for any advice.

          I would pass. A minimum credit score of 600 and  BK doesn’t really show sound financial decisions were made. 

          What happens if they get in a argument and mom or the hubby/wife team moves on. What's their debt to income ratio? They may make 3x rent but if your rent is 33% of the income and their DTI is 55% theire gonna have issues.

          What I learned is if you have to fight and justify so much to get a tenant qualified you’re better off moving on to another tenant.

          If this is the best you can find I would ask for the highest amount of security deposit you can legally ask for, would only do month to month leases with a guarantee no rent raise for 12 months (I have done this with shaky applicants)  and make sure all the utilities get transferred in their name before move in and all deposits are paid in full no payments.

          You have to know your area. A certain renter pool in a certain state,county,city  might have average credit scores and income levels of XX.

          So some posters commenting to have very high credit scores and no flaws on credit might not be normal for this area mentioned.

          A lot depends on area. In some high crime or low income areas the scenario mentioned might be gold for an ideal tenant versus what else a landlord could run into.

          Big difference in renter pool for 100k house and 500k house. 

          @Frank Chin Thanks for taking the time to respond. I appreciate your stories and advice. That is crazy about the Morgan Stanley guy. I like the perspective of government sourced income v. job-based income. It is good to think about. The bankruptcy has me a bit stumped because it shows past poor financial management. I am struggling a bit with this one.

          Natalie Landry

            @Rob D. This quote is gold....What I learned is if you have to fight and justify so much to get a tenant qualified you’re better off moving on to another tenant.  I appreciate you taking the time to respond.

            Natalie Landry

              Originally posted by @Natalie Landry :

              @Rob D. This quote is gold....What I learned is if you have to fight and justify so much to get a tenant qualified you’re better off moving on to another tenant.  I appreciate you taking the time to respond.

               Hope you find qualified tenants. Just make sure you get as much proven info as needed to make a sound decision. 

              Originally posted by @Thomas S. :

              The husband does not qualify for 3X income to rent. This is a easy decision, pass.

              Several scenarios possible that makes this a easy decision to pass..... mother dies or husband leaves.

              You should also raise your minimum credit score. 600 is way too low placing you only one point above financially irresponsible territory. You should not be going below 650 if you want to get any reliable level of financially responsible applicants

              In the US, Familial status is a protected class.  It is illegal to qualify tenants in the manner in which you give as examples.  The "husband leaving" the "mom dying"... these are risky qualifiers that may land you in a Fair housing nightmare of a lawsuit.

              Whenever I rent to folks I take a very relative approach. I usually ask myself these questions;

              How badly do I need to rent this place?
              Are these the types of renters I want here?
              What is my gut saying?

              At times I have been financially in great shape and not felt any pressure to rent to people. At others I have been pretty strapped for cash or burned out and rented places with my “eyes half closed”. It really just depends on where you are at on that spectrum.

              At many apartment communities in California they allow Bankruptcy as long as it's discharged. I would also average the scores out and look at the actual report and not just at the score. If you need extra security you can always ask for more of a deposit. Hard for me to say what I would do in your position (since I don't have all their information in front of me) but one positive thing is you have multiple sources of income. In this case the rental references would be extra important. You can always check to see if his prior landlord was included in the BK case.

              @Natalie Landry I have no problem finding applicants in my C+/B- properties. I have learned that low income and financial responsibility are not exclusive. 

              @Cara Lonsdale  

              "Familial status is a protected class."

              We have the same human rights police here as well. Personally I don't care since I place my business interests first however I would simply reject them due to insuficient income from the primary bread winner. I never provide a reason to any applicant. This is another advantage of having a higher minimum credit score requirement. It can be used, if necessary, to eliminate many more undesirables legally.

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