Screening Tenants with Medical Debt

[Max T.]

I have some otherwise qualified applicants, except for the fact that one (they are engaged) has some significant debt in collections showing up on his screening report. He tells me it is medical debt from when he was in college and uninsured. This was + 2 years ago but has a bad affect on his overall score.

How would you experienced managers proceed?

[Greg Weik]

As a general rule, collections debt and low credit scores generally, post more of a bankruptcy risk than an eviction risk. 

Commonly, landlords look at collections and worry about rent payments.  15 years in property management and I can tell you that's not the real concern, it's the bankruptcy, and here's why. 

If your tenant files for bankruptcy, they can list the lease under their list of debts.  This means that you, as the landlord (a creditor) cannot make any efforts to collect on this debt while the BK process is unfolding - including filing an eviction.  If you violate this, I believe the fine is in the order of $10,000

So in the event you have a tenant who files for BK, you will need an attorney to file a motion called a lift of stay.  This is an attempt to remove the lease from the list of debts the tenant has filed with BK court.  If granted (weeks, probably $500-$1,000), you can then re-initiate the eviction process. 

Long story short, your best bet is to collect a larger security deposit if credit is not great - but even that depends on the context of the property, i.e., how much interest is it getting, how likely are you to find a better applicant, etc.  

We look at medical collection debt differently than rental collection debt, for obvious reasons.  Most people prioritize paying their rent, and I see thousands of medical collections come up on credit scores every year.