The Landlord’s Complete Guide to Tenant Bankruptcy Filings

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I live and work in one of the Chapter 13 Bankruptcy capitals of the United States, Memphis, TN. Only the Atlanta and Chicago areas had more Chapter 13 filings than Memphis in 2014. Memphis has held this distinction for many years. No one really knows or has been able to fully explain why Memphis has this dubious distinction; it just seems to be a fact of life here.

Memphis is also a city of renters. Large portions of the population live in rental housing. Yes, that makes Memphis a strong rental market and attractive to investors from all over the world. But it also means that many of those people filing for bankruptcy here will be tenants.

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How Does a Tenant Bankruptcy Filing Affect the Landlord?

To figure that out, let’s start when a tenant gets behind on the rent.

It can be very easy for some tenants to get behind very quickly. Many people are only one paycheck away from financial hardship. An illness, car breakdown or just a series of bad decisions can create the tough choice between paying the rent or putting food on the table.

When tenants get behind on the rent, some landlords are very quick to pull the eviction trigger. They or their attorney will rush down to the courthouse to file for the FED warrant. While it is true that you do have to demonstrate to your tenants that you will not mess around, being too quick to pull the eviction trigger may just backfire on you, as we will see.

What Happens During An Eviction

When you file to evict your tenant, that filing becomes public record. Anyone can go down to the courthouse (or just go online) and look up the recent filings. Many real estate investors are already aware of this as they look up filings for foreclosures or tax sales for their particular marketing programs. Bankruptcy attorneys do the same thing with eviction filings.

Related: Your Complete Guide to Effectively Handling Tenant Evictions

Bankruptcy attorneys will soon be flooding the mailbox of your tenant with all kinds of solicitations. Those postcards and letters will say things like, “We can stop your eviction,” or “Stay in your home” and “Stop those harassing landlord calls.” It can all be very enticing to a tenant who has gotten behind. Some will see no other way out and will be convinced that filing for bankruptcy makes sense for them. If they do, your job as a landlord just became much more difficult.

Chapter 7 and Chapter 13 Bankruptcies

Personal (as opposed to business) bankruptcies generally come in two forms, Chapter 7 and Chapter 13.

A chapter 7 bankruptcy is a filing that is asking for many debts to be simply wiped away and forgiven. The standards for filing and getting a Chapter 7 approved are more complex and daunting, so most will file a Chapter 13. Chapter 13 is also called a wage earner plan, and it seeks to restructure debts into something “manageable” that the person filing it can pay. Most creditors will likely get something out of a Chapter 13 filing, while a Chapter 7 filing could wipe any monies owed away.

Recap

So let’s recap.

Your tenant got behind on the rent for whatever reason. You file for eviction. A bankruptcy attorney sends a letter, and your tenant decides to file a chapter 13 bankruptcy.

What does that mean to you? First and foremost, your eviction proceeding is halted. Yep, you are dead in the water. Why? An eviction is filed in a state court. A bankruptcy is filed in a federal court. Federal courts trump state courts. Thus, an automatic “stay” is put in place against your eviction proceeding. A local judge will not even hear the eviction case until an okay is granted from the bankruptcy court.

Secondly, your tenant gets to stay in the property. Furthermore, they do not have to pay you rent until they get the okay from the bankruptcy court.

Thirdly, you cannot attempt to collect any monies owned to you. You cannot call them. You cannot go knock on their door. You cannot text or e-mail them. You are now considered a creditor by the bankruptcy court, just like Visa or MasterCard, and you must stop trying to collect the debt or face contempt of federal court.

Related: Considering Accepting Money after the Eviction? Beware!

In effect, your tenant has bought some time. They get time to keep living in your property without paying you rent. Yes, you can often get the stay against your case lifted, but you will definitely need the services of an attorney familiar with bankruptcy court procedures. So after 3, 4, or 6 months — and hundreds if not thousands of dollars in extra legal fees and lost rents — you may finally get your property back.

What Are the Right Steps to Take?

What should you have done?

You should have tried your best to work out some kind of deal before you file for eviction and the tenant files for bankruptcy. Remember, filing for eviction triggers all of those letters and postcards offering the tenant a way out. If they choose to take that step and file bankruptcy, you are going to be out of a lot more and in a much worse position than you are today.

All of this is just another reason why I feel filing for eviction is an absolute last resort. Yes, I understand that sometimes it just has to be done. No, the tenant will not always file for bankruptcy, but the option will definitely be presented to them. So do your best to work out a deal on the front end. In my mind, it is better to lose a little up front and get possession of the property back rather than lose a lot more money and time down the road just to end up in the same place.

Do you have any tenant bankruptcy stories you would like to share?

Please do so with your comments below!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

22 Comments

  1. I have always said, if the tenant is brand new in a lease, it probably makes sense to go ahead and file for eviction. But if a tenant has a good history of paying, then it totally makes sense to work with them. To many times, our investors get frustrated when we don’t file on the 6th, but as you know, most of the time they get caught up. Does anyone really want to be evicted? Property Management is like a chess game; you have to be able to read people, use different stratigies for different situations and know when it is time to take a move against your tenant.

    • Kevin Perk

      Alex,

      Wise words indeed.

      I think I agree with you on someone who you have no track record with. Sometimes you may have to show that you mean business upfront so they do not continue to take advantage of you. On the other hand, how did they slip through your screening process?

      You are quite correct though in regards to tenants you have a decent history with. Everyone hits bad times. If they communicate and work with you then I think most landlords will work with them. Like you say no one wants an eviction. It is messy and just plain nasty. But sometimes, even knowing that a bankruptcy is possible, that last resort has to be taken.

      Thanks for reading and taking the time to comment. Do you have any good bankruptcy stories to share?

      Kevin

  2. So I understand the risk analysis that must be done when determining whether to be aggressive in filing eviction notices. What process do you recommend instead? I like Alex Craig’s recommendation to file quickly if it’s a new lease, because you may have someone who makes a habit out of not paying the rent on time. Do most states have a maximum late fee the landlord can assess for not paying on time? Having a huge $500 late fee if you don’t pay by the 15th may filter out those who are truly having a hard time and they contact you to make arrangements, versus those who are out to game the system.

    I am very interested in this topic, as my company is about to venture into the property management field on a huge scale at the beginning of the year and this is the one risk that we are still determining how to effectively manage.

    • Kevin Perk

      Micheal,

      It is like you say, a risk analysis. I do not know that I can recommend a specific process for you to follow. You will have to kind of feel your way through it based upon your knowledge of the tenant and their situation. However, you do need to know all of the potential outcomes in order to make your decision, and hopefully my post has helped you in that regard.

      I like Alex’s advice as well. He manages a lot of properties here in Memphis so he speaks from experience.

      I do not know about states and late fees. I know Tennessee has a max and I would suspect most other states have one as well. Do your research and know what you are getting into.

      Best of luck on your new venture. Let us know how it goes.

      Thanks so much for taking the time to read and comment,

      Kevin

  3. I work with most of my tenants the first few times they are late.They pay their late fees and attorney fees if need be to get caught up, Unfortunately, they all tend to go through a 3-4 month cycle of being late before they can no longer catch up. I have had to evict all of them. That said, I feel my turnover rate is to high, so I’m looking at some different financial screening to help minimize these issues up front.

    May I ask, what is your minimum income vs rent, do you require cash reserves, minimum credit score etc?

    Jason

    • Kevin Perk

      Jason,

      We require a monthly income of three times the amount of rent and we also require a minimum credit score. But you will likely have to adjust your criteria based upon your local market conditions. All real estate is very local, so you need to know what type of tenant base you are starting from and then work your criteria from there. Sounds like you may need to do a bit of fine tuning. Perhaps criteria like length of time on the job and length of time at their last residence to look for stability along with income and credit score.

      Good luck and let us know if you have success.

      Thanks for reading and for the questions,

      Kevin

    • Kevin Perk

      Kay,

      I would keep up with the repairs for a few reasons. One, I want to keep my property in good condition. Two, I do not want it to come out in front of a bankruptcy judge that I am not making repairs as it might hurt my standing. Third, it would give me a chance to see the property and interact with the tenant. I can make sure things are being kept up.

      Thanks for reading and commenting,

      Kevin

    • Kevin Perk

      Eric,

      It is hard to say. Depends on what is hurting them financially. For example, if it is medical bills they are trying to get out from under they may continue to pay you. Not much you can immediately do if the do not. If you are listed as a creditor in the bankruptcy, be sure you protect your interests by notifying their attorney and going to hearing if necessary.

      Let us know how it turns out and tanks for commenting,

      Kevin

  4. Here’s a suggestion I recall from many years ago
    We charge a late fee if tenant is late – why not offer an early payment discount if they pay early?
    Say fair rent is $500 and late fee is $50. Write your rental agreement with the rent at $550 due the 1st, but you get a $50 discount if your rent is in your office by 12.00am on the 26th of the month preceding (I want to make sure I can pay my mortgage on the 1st, and am willing to give a discount for early payment). If rent is not paid by the 4th of the month, a late fee of $50 is payable.
    This particular landlord had a timestamp outside his office and a drop box. He claimed that often rent envelopes would be stamped at 11:58pm – these were often from renters residing several miles from his office.
    He would also give his tenants a maintenance number to call, and offer another quarterly rebate if he never heard from them in that quarter for maintenance service.

    • They are usually either young and inexperienced attorneys who get burned, or older wiser ones who get all of their fee upfront. I have a huge problem with the whole concept of bankruptcy. It was explained to me that it gives people who have no possibility of ever paying their debts a chance to be productive citizens again. In my experience, it gives people the ability to cheat landlords, etc. out of small sums and then do it again.

      Personally, I think it better to have a small monthly payment until death and then the balance due should be subtracted from the estate.

    • Kevin Perk

      Amy,

      Almost everyone has some money, they just can’t pay everything they owe so they decide to pay an attorney a few hundred dollars upfront to open a bankruptcy case for them. It does not take much of the lawyer’s time and if they stop paying the case is thrown out, but only after they got to stay in your place rent free for a while.

      So the lawyer makes a few hundred dollars and then moves on to the next one and then the next one and the next one.

      Thanks for reading and commenting,

      Kevin

  5. I had a “fun” experience with a former tenant. I had filed for eviction as a last resort after they did not pay rent and avoided any contact with me to discuss options. When I showed up to small claims court for the eviction, the judge told me that they had filed for Chapter 13 bankruptcy and he could not help me. He suggested I see my attorney about what to do next. My attorney said that he had gotten out of the bankruptcy business since the clients tended to not pay him. (Imagine that!) He gave me some sample forms and suggested that I file a motion with the federal court myself to lift the stay on the eviction. I filed the forms and paid my $75 filing fee and they sent me notification that the initial hearing would be in 2 weeks. I showed up on the appointed day, then sat and observed the judge ask my tenants some preliminary questions such as “Have you ever filed bankruptcy before?”. They answered “No” and then he ascertained that they were representing themselves and had no attorney.

    I had looked up their bankruptcy court records when I was finding out how and where to file my motion and discovered that they had filed a Chapter 7 bankruptcy 8 years prior and a Chapter 13 two years earlier (which they failed to disclose on my rental application as well, so when the judge asked me whether I had any questions, I said, “I am curious why these people have failed to disclose to you their previous two bankruptcy filings dated … and …”.
    Of course, this caused them to look very bad to the judge and I think this had something to do with them voluntarily moving out of my house that weekend. They probably didn’t want me to show up to their next hearing. lol

  6. I recently had a bad run with a tenant that from the get go did not and has not paid a dime. He moved out after owing me almost $6000.00 and there is still a judgment against him in the District Court. So my question is it is about 2 weeks now since all of the dust has settled and I received in the mail a Chapter 7 Bankruptcy Case that is within the same District Court. Will this mean unless I supply supplementary information he will essentially have it wiped away the debt he owes me?

    • My understanding is that a Chapter 7 bankruptcy wipes out all debt. The catch is…the debtor has to list all the creditors and debt in the filing. If it is not listed, it is not included. Check to see if the judgement is listed on the filing, if not…it is not included and is still owed. Careful though…sometimes they can amend the list if “they forgot something or someone” so wait until the dust settles to pursue.

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