One of the worst things that can happen to a landlord trying to run a profitable income property business is to have a non-paying tenant. When this happens, your Phoenix property manager must start the eviction process. And this can take months to resolve.
Meanwhile, you’re not collecting rent and aren’t able to place a new a new tenant.
Sounds terrible right?
Well, it is. But what can be even more damaging to your rental property business is a tenant that declares bankruptcy. After all, if this happens, chances are slim they’re going to pay their rent. And your options for resolving the issue are even worse than starting an eviction.
Want to know what to do before your Phoenix, AZ tenant declares bankruptcy? Check out what bankruptcy is and what options you have to protect yourself and your investment.
What is Bankruptcy?
Bankruptcy is the legal status of someone that cannot repay their debts to creditors. When someone files for bankruptcy, the courts determine what options are available.
The two main types of bankruptcy a tenant can file for include:
Chapter 7 Bankruptcy
When lots of debt (e.g., credit cards, medical or utility bills, or personal loans) is dismissed. This is the most common form of bankruptcy in the United States. Adding to that, in 2016, 95.5% of the nearly 500,000 Chapter 7 bankruptcies filed were discharged. In other words, a half million people had all their debt wiped away and moved on with a clean slate.
Chapter 13 Bankruptcy
When a person has to reorganize their debt and make payments to creditors. Repayment plans usually last between 3-5 years. This type usually happens because of job loss, illness, or unexpected expenses.
What Happens If Your Phoenix, AZ Tenant Files for Bankruptcy?
When your tenant files for bankruptcy the court grants an automatic stay halting all collection efforts. This leaves you with a non-paying tenant and very little you can do about it.
That said, there are many things that determine the level of control you have over the situation.
Let’s look at the most common.
Situation #1: The Tenant Files for Bankruptcy and Then Fails to Pay Rent
If your tenant doesn’t pay rent after declaring bankruptcy, the automatic stay prevents you from terminating the lease. It also prevents your Phoenix property managers from initiating the eviction process.
You can ask the court to lift the stay so you can proceed with an eviction, but it’s not guaranteed. That said, most judges lift the stay for landlords.
Situation #2: There Was Illegal Drug Use or Property Endangerment
If there was illegal drug use on your property or property endangerment, you can override the automatic stay. This means you can continue with eviction proceedings.
Just make sure you or your property management company understand the following:
- If an eviction began before the bankruptcy filing, you must file a certification with the court. It will state there was illegal drug use or property endangerment.
- If an eviction began after the bankruptcy filing, you must file a certification with the court. It will state that illegal drug use or property endangerment happened within the last 30 days
The certification must be served to the tenant. After 15 days, you can start the eviction process unless your tenant is disputing the claims. If there’s a dispute, the court will hold a hearing and decide whether to allow you to continue the eviction or not.
Situation #3: The Tenant Files for Bankruptcy after an Eviction Judgment
Before 2005, the law made it so a tenant could file for bankruptcy after the threat of an eviction. They could then stop their landlord from collecting rent. This was because of the automatic stay and left no resolution for the landlord.
After 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed. It gives landlords more control over evicting tenants for non-payment of rent. It even applies to tenants going through bankruptcy proceedings. In fact, it gives landlords the power to ignore the automatic stay.
The only way a tenant can halt the eviction is by following these steps:
- File a statement with the court that says state law allows a tenant to stay in a rental and pay the late rent after being issued an eviction notice
- Deposit with the bankruptcy clerk the amount of rent that’s due 30 days from the filing of the objection
- Serve you (the landlord) with a copy of the sworn statement
You can object to this process and make the claim to the court that your tenant is putting you at financial risk. The court will have the ultimate say in whether the eviction will move forward or not.
Situation #4: Your Tenant Files for Bankruptcy and Rejects the Lease
Your tenant can reject their lease agreement when filing for bankruptcy. If this happens, they have to vacate your property immediately and turn the property over to you.
This leaves you mid-tenancy without a paying tenant. You can seek relief from the courts for unpaid rent. However, you’ll have to go through the bankruptcy court. And the debt will be considered unsecured debt. In other words, the debt is not attached to a physical piece of property.
This makes collecting past due rent more difficult. Most states cap the amount you can collect in unpaid rent due to tenant bankruptcy.
Another option is to let your tenant find a new, highly-qualified tenant to take over the lease. Many lease agreements prohibit this practice. Yet, bankruptcy code allows tenants to assign their lease to another because of bankruptcy.
What to Do If Your Tenant Files for Bankruptcy
Dealing with a tenant bankruptcy is stressful. That’s why you or your Phoenix property manager should stay ahead of all bankruptcies.
Of course, it’s tough to know when a tenant will file for bankruptcy, especially if they’ve been paying their rent. That’s why you should have strict rent payment procedures in place from the start. This includes a set due date, late payment consequences, and immediate eviction filings.
If you find out your tenant is filing for bankruptcy, try negotiating a pre-bankruptcy resolution with them.
Options during negotiation include:
- Modifying the lease agreement to keep the tenant there and paying
- Working out a lease termination that works for both you and your tenants
If you want to negotiate with your tenant, talk to a Phoenix property manager. You’ll want to avoid things like preference rules. Preference rules are complex regulations. They prevent one creditor from making a deal that helps hurts another creditor.
Lastly, if your tenant files for bankruptcy and wants to leave, the best thing you can do is start advertising your property. The quicker you place a new tenant in your property, the less money you stand to lose in the long run.
Looking for Qualified Phoenix Property Managers?
Does the thought of dealing with a tenant bankruptcy make you want to give up on being a landlord?
Don’t let it. If you enlist the help of an experienced property management company, such as Stratton Vantage, you won’t have to worry about what to do if your tenant files for bankruptcy.
We have strict tenant screening procedures in place to avoid leasing your property to tenants with financial problems. We also cover the costs of evicting tenants in case something unexpected happens. And if a tenant does file for bankruptcy, you can trust that we have the legal knowledge to help you every step of the way.
So, if you own a rental property and want the reassurance Phoenix property managers provide, contact us today. We’re a full-service property management company dedicated to helping you succeed. And if that means help you recover from a tenant bankruptcy, you can count on us.