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What to Do if a Tenant Files for Bankruptcy

rental tenant files for bankruptcy

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One of the biggest issues a landlord can face is a non-paying tenant. When that happens, if the tenant does not leave voluntarily or by request, you start the tedious eviction process. But what if the tenant files for bankruptcy? Then the situation becomes more complicated.

What Happens When a Tenant Files for Bankruptcy?

Any rent incurred before the tenant filed for bankruptcy might be up for review as unsecured claims. You can discuss the issue with the tenant’s bankruptcy trustee.

There are four types of bankruptcy, but the two most common that tenants file for are Chapter 7 and Chapter 13.

  • Chapter 7 bankruptcy: also known as straight bankruptcy, is for anyone with a lot of unsecured debt (e.g., credit cards, medical bills, personal loans, etc.), and the debt is dismissed.

 

  • Chapter 13 bankruptcy: also known as reorganization, is for anyone who faces short-term financial setbacks, like the loss of a job, long-term illness, or unexpected expenses, and reorganizes their debt into a payment plan.

Either type, when filed, results in the court granting the tenant an automatic stay. This statutory injunction prevents you from evicting the tenant.

How Do You Respond to Tenants Filing Bankruptcy?

If you think your tenant is going to file for bankruptcy, you best start the eviction process before they file. Seeing as how no one is clairvoyant, however, there are measures you can take when bankruptcy is filed:

  • Know the Exceptions: There are always exceptions to a mandate. You can still evict the tenant for other reasons than they refuse to pay. Reasons include damage to the property, criminal activity, or health ordinance violations. Confirm exceptions with a court authority or the tenant’s bankruptcy trustee.

 

  • Talk (Often) with the Tenant’s Bankruptcy Trustee: This individual is responsible for the tenant’s financial affairs and distributes assets to creditors. You are owed rent, but as to when you get paid, you’ll have to take that up with the trustee. At least they can keep you in the loop and explain proceedings and your options.

 

  • Sell the Property and Start Over: This option seems a bit extreme, but perhaps there are other reasons to sell: the property is old and outdated, in constant need of repair, has costly maintenance and utilities, and high property taxes. It may be time to start over somewhere else. You can sell the property and use the proceeds to buy a new rental in a better location.

Sell to a Real Estate Investor

Traditional buyers do not want to buy a rental with non-paying tenants. Consider then selling it to a real estate investor. Most investors will offer cash for a property “as-is,” be it damaged, vacant, or have bad tenants still living there.

Investors do not require traditional sale warranties or inspections. They pay all closing costs and additional sale fees, and you pick the closing date. Depending on paperwork and other issues (e.g., liens or taxes due), the sale can close in 30 days or less.

You can enjoy a quick closing, offload a problem rental, and start over with a better rental, using the profit from sale.

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