Understanding what a history of bankruptcy in a potential tenant

6 Replies

I am having trouble filling one my C properties.  Tons of interest, especially since dropping the price, and people applying but not meeting criteria (income too low, etc).  I now have a tenant with high enough income and otherwise meets criteria who filed Chapter 13 bankruptcy in 2010 and completed in 2015.  Owned a home for 15 years which he just sold since he is relocating.  I know that "no tenant is better than a bad tenant" and have always just refused anyone with a history of bankruptcy, but I am trying to educate myself more on this.

I've tried reading on Bigger Pockets but just find people opinions and theories.  I've tried google searches but most websites explaining the details are very convoluted and difficult for me to understand (I do have a Masters degree and read a lot, but for some reason having trouble wrapping my brain around the complex bankruptcy laws).  My attorney is currently out of the office until next week and I'd like to find info asap.  Does anyone have any books or links they can recommend?  I'm specifically wanting to know if the "can't file bankruptcy for 7 year" rule applies from date of start (2010) or finish (2015).  And if there is anything as a landlord I can do to mitigate the risk of losing a ton of money if someone files bankruptcy since it appears you cannot legally evict someone once they file BK.  I'm considering asking for an extra large deposit (right now it's $1200 - will likely ask for $3500 to cover 2 months rent) but not sure if I can legally do so? Also, I'm reading that, even if I add something to the contract about being able to evict them in the case of BK, it's usually not enforcable.

I realize I will need to discuss the intricacies with my attorney when she's back, but in the meantime, I'd appreciate any personal stories/experiences anyone has had with this, or any reading materials you can recommend.

Thank you in advance!!

@Sarah Buchanan I think this is a judgement call. My thoughts are if they meet income requirements have no major issue with their credit or criminal issues then I would meet with them and make a decision. I would charge first last and deposit or at least a 1.5x deposit before renting to them.

If their credit shows they pay all there bills on time since bankruptcy then I would give them a chance.

Actually, this simple question has a complicated answer, like so many things in this wonderful business.

I interpret your question as, "should I accept an applicant that had a bankruptcy"?.  My question would be, "what factor(s) caused the bankruptcy"?  Let's look at the big picture:  2010 was 2 years after the financial meltdown our country suffered.  Lots of people lost jobs, homes, everything (almost.) 

Was it overwhelming medical debt?  That, believe it or not causes many cancer patients into bankruptcy.  Job loss or business closing, divorce, death in family--find our what was the cause.

On the positive side, this applicant filed chapter 13, which is a payment plan, to pay creditors back a negotiated amount on a monthly basis, AND they stuck to it and finished 5 years later.  To me, that shows some character, because I've seen many cases of people starting that plan and not making the payments, and the plan gets voided. 

All other factors considered, in a C type property, with a candidate like this, with the income and available funds to rent, stable job history, I personally wouldn't reject them just because of bankruptcy.

Questions about eviction if someone declares bankruptcy during their tenancy with you are for your attorney.

One last thing to keep in mind:  banks will consider lending purchase money mortgages to someone who is out of bankruptcy 2-3 years to buy a house. 

Hoe this helps.  Good luck.

Originally posted by @Sarah Buchanan :

  I'm specifically wanting to know if the "can't file bankruptcy for 7 year" rule applies from date of start (2010) or finish (2015).   

The time clock for this typically begins at the filing date. However, the length of the actual waiting period for refiling and being eligible for another discharge can depend on other factors, such as the type/chapter of bankruptcy filed the first time and the type/chapter of bankruptcy if refiling. 

Here’s some reading that explains this further:

How Often Can You File for Bankruptcy?

Sarah, I just felt with a similar situation. I had a tenant who'd filed 2 years ago, due to divorce. I required 1st & last month's rent, reviewed previous rental history (no late payments), employment (horizon looks stable), and income (more than 3x monthly rent). His credit score was just over my threshold, so other than the BK, he looked ideal. We decided to go ahead and rent to him. We're less than a week into tenancy, so I don't have much to report other than both cashier's checks have cleared fine, and he is very happy with our property. I'll keep you updated. One thing I learned on here was using Cozy.co to collect payments electronically, can also report rent paid as a positive trade line. This can incentivize a tenant who had a bad situation to help them selves by paying you rent to rebuild credit. Something to consider if you otherwise feel ok with the tenant.

@Steve C. thanks for sharing your experience! I currently use Cozy.co to collect rent on other properties but didn't realize this so that's good to know!!  Good luck - I hope yours is a good tenant! :)

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