You’ve no doubt done your due diligence in finding a responsible tenant for your rental property. You’ve performed a tenant credit check, background check, and other essential screenings. However, you can’t spot everything — sometimes life happens and your tenant files bankruptcy.

Tenants who find themselves in financial trouble may file for bankruptcy. This is the best option for them, but it presents a few unique challenges for you. You can hardly expect them to make their usual rent payment under these circumstances.

But you won’t be completely without restitution. Landlords of commercial and residential properties should be aware of a few important rules regarding tenancy amid bankruptcy.

Bankruptcy laws

It can be very helpful to more carefully examine bankruptcy laws in order to understand how they affect you and your property. The easiest way to get more information is to reach out to an attorney in your state. For example, if you live in Massachusetts, you might reach out to a bankruptcy attorney in Springfield, MA. They’ll be up to date on detailed information regarding bankruptcy in your area, and they’ll be able to answer specific questions you have about your case.

As you research bankruptcy information, look into the different chapters of bankruptcy. Most people file under Chapter 7 or Chapter 11 bankruptcy. If your tenant is filing under Chapter 7, the court appoints a trustee to liquidate your tenant’s assets. This is used to pay debts, and if there’s anything leftover, you’ll receive payment for your rent. You can learn more about Chapter 7 bankruptcy here.

If your tenant files Chapter 11 bankruptcy, you’re in a better position. The debtor keeps control of their business, and all profits from their business are put towards their debt. Since they’re still making an income, you’re more likely to receive your rent payments each month. But if they don’t make payments, you may not be able to evict them, because they must keep the business in operation to pay off their debts.

Administrative claims

Thankfully, there is a law that protects landlords in the event of bankruptcy. Bankruptcy Code Section 365(d) requires that the debtor must still pay rent and adhere to lease obligations until the landlord releases them from those obligations.

If the tenant fails to make regular payments before the lease is up, the landlord may appeal to the bankruptcy court with an administrative claim. A judge then compels the renter to pay rent and perform other lease obligations (such as maintenance or insurance payments) if it’s in their power to do so. If not, you’ll be added to your tenant’s list of debtors and receive compensation when the money is available.

Tenants going through bankruptcy may also be required to pay administrative rent if they continue occupying the property even after their lease expires or is rejected. You and your tenant will work through bankruptcy court to calculate a reasonable rent payment; it’s usually the same as the amount stated in the original lease.

Terminating a lease

You don’t want to get stuck in a situation where your tenant is bankrupt and you’re left without on-time rent payments. Therefore, under Bankruptcy Code Section 365(d), you have the right to terminate a lease under certain circumstances.

Standard rental agreements dictate that the lease is breached if the tenant files bankruptcy, and they may terminate the lease. However, you can’t declare a termination or breach of the lease just because your tenant filed bankruptcy. If they continue to make payments or their business must remain operational, you may not be allowed to evict them. You also can’t increase rent or a security deposit because of the bankruptcy.

If you have any questions about handling your tenant and bankruptcy, it’s best to reach out to a bankruptcy attorney for accurate information in your state.

Shift Frequency © 2019 – Educational material