Home Legal Advice What Happens When Your Tenant Files for Bankruptcy? – Rocket Lawyer

What Happens When Your Tenant Files for Bankruptcy? – Rocket Lawyer

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A tenant declaring chapter is rarely excellent news for a landlord. Even should you’ve been accumulating full lease to this point, it means your tenant is having severe monetary issue that would impression your earnings as well. If a tenant recordsdata for chapter, otherwise you imagine that they might, it would be best to perceive the method, your rights and obligations as a landlord (and creditor), and the way their chapter could have an effect on your livelihood.


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What is the distinction between a “secured claim,” an “unsecured claim,” and an “administrative claim” in chapter?

There are three common kinds of claims in a chapter.

  • Secured claims are for money owed backed by particular property. For instance, a automobile loan is secured by the automobile. Secured claims usually have the best precedence in a chapter, with the secured creditor having the correct to make use of the asset to repay the debt.
  • Unsecured claims are for money owed that aren’t secured by an asset, comparable to bank card debt. This is usually another sort of debt that occurred earlier than the chapter.
  • Administrative claims are claims for brand new money owed the debtor incurred after submitting for chapter.

The distinction between administrative claims and unsecured claims is that administrative claims are usually paid earlier than unsecured claims. This is vital as a result of the tenant could not come up with the money for to pay the entire claims in full. Administrative claims receives a commission earlier than unsecured claims as a result of chapter legislation doesn’t give debtors the good thing about taking over and discharging new money owed after they already began the chapter course of.

A landlord could have each unsecured and administrative claims towards a tenant. Any lease and different fees incurred earlier than the tenant filed for chapter are unsecured claims. If the tenant continues to not pay lease after submitting for chapter, the owner could petition to have that dealt with as an administrative declare.

What is an automated keep and the way does it have an effect on lease assortment when a tenant recordsdata for chapter?

When a debtor recordsdata for chapter, their people that are owed money are usually barred from any sort of assortment activity outdoors of the chapter courtroom course of. Landlords could not terminate a lease or evict a tenant with out going by the chapter courtroom. Landlords also needs to seek the advice of with an lawyer earlier than sending further late cost notices or taking different assortment actions.

This prohibition on taking motion is named a “stay” in authorized phrases. It is automated as a result of it takes impact simply by the tenant submitting for chapter. A landlord could petition the chapter courtroom for reduction from the keep if the tenant is damaging the property or if the tenant continues to not pay quantities that come due after the tenant recordsdata for chapter.

For instance, a tenant misses two months of lease earlier than submitting for chapter. The landlord has an unsecured declare for these two months plus late charges or different fees under the lease. Then the tenant doesn’t pay for the month after they filed for chapter. The landlord now has an administrative declare for the extra month and might request that the courtroom finish the automated keep and permit the tenant to be evicted.

May I terminate the lease after a tenant recordsdata for chapter safety?

A tenant submitting for chapter safety doesn’t mechanically provide the proper to terminate a lease. You would want a authorized floor for termination, comparable to a violation of the no-pets provision within the lease agreement. If you came upon your tenant had declared chapter however had been totally complying with the lease agreement, you usually wouldn’t be capable of terminate their lease only for having declared chapter. 

Keep in thoughts that state and native legal guidelines could give tenants further protections past federal chapter legislation. In addition to looking for the courtroom’s permission to terminate the lease, you may additionally have to undergo the state courtroom eviction course of. Keep in thoughts that tenants even have further rights through the COVID-19 pandemic, together with rights towards evictions for nonpayment of lease throughout federal and state eviction moratoriums.

You and your tenant could mutually conform to cancel the lease if each events imagine it’s in your finest pursuits to take action. However, it is best to train care to keep away from the looks that you’re forcing or pressuring the tenant to take action in violation of their chapter rights.

What are the tenant’s obligations after they assume or reject the lease following a chapter submitting?

A tenant sometimes does have the choice to terminate their lease in chapter. The default deadline for them to choose is 60 days after submitting.

  • If the tenant assumes the lease, they comply with proceed to honor it. They should pay any future quantities as agreed and pay any overdue quantities in full and in a well timed method as accredited by the courtroom.
  • If the tenant rejects the lease, they might terminate it. The tenant’s legal responsibility for future lease ends on the later of the date of termination or once they truly vacate the premises. The landlord could make a declare for any quantities owed as a part of the chapter course of.

Understand your rights and obligations as a landlord

Because of the complexities intertwined in federal chapter legislation as well as federal and native tenant protections attributable to COVID-19, it’s at all times a good suggestion to be taught as much as you’ll be able to in regards to the course of and the way it impacts you as a landlord. If you’ve particular authorized questions, you’ll wish to talk about any sort of motion you’re contemplating with a Rocket Lawyer On Call® attorney.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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