At one time, Chapter 13 bankruptcy, the so-called wage earner’s plan, was a landlord’s worst nightmare. Sweeping legal changes that went into effect in 2005, changed this dramatically. Chapter 13 bankruptcy still allows a debtor to propose a payment plan for his or her past due debts, while also paying his or her current obligations on time. Creditors might not be paid in full for arrearages, and payments can be spread out over monthly payments for sixty months. On the other hand, landlords are given greater protections and can ask for permission to proceed with eviction under certain circumstances.
Debtors can file under other bankruptcy chapters, as well. Chapter 7 bankruptcy is for liquidations; Chapter 11 bankruptcy is a reorganization for businesses and for consumers with large debts; and, Chapter 12 bankruptcy is for family farmers. Each type of bankruptcy has its own rules and procedures. However, as a landlord, you are most likely to encounter Chapter 13 bankruptcy.
First, understand that when a person files for relief under Chapter 13, all collection activities must stop immediately by creditors who are listed on the bankruptcy petition. There are some exceptions, but caution is always best until you speak with a lawyer.
When confronted with a claim that someone has filed, ask for a case number and the name of his or her attorney, so you can confirm the information. You should also check the PACER (Public Access to Court Electronic Records) at http://www.pacer.gov/ in order to see the actual documents, and find out whether or not you were listed as a creditor. Currently, the charge is 8¢ per page that you view, and there is no monthly access fee or subscription charge. If you are not listed as a creditor, your collection activities do not have to stop, even if you have actual knowledge of the bankruptcy filing.
If you are listed as a creditor on the bankruptcy petition, all collection efforts must stop immediately. You are not allowed to contact the debtor at all, except for routine matters not connected to collecting your debts. In a Chapter 13, if you have two or more tenants equally liable on the lease, but only one of them files for bankruptcy, you still must stop your collection activities against all of the tenants.
You will receive a notice from the court advising you of the date and time of the 341 Meeting, also called the First Meeting of the Creditors. Many other debtors will have their 341 Meeting scheduled for the same date and time. Come prepared to stay awhile, but leave your cell phone and other electronic devices in the car, because those are usually prohibited and may be confiscated when you go through security. Your 341 Meeting notice will also include important deadlines, including the date by which you must file your Proof of Claim.
The Chapter 13 Trustee will ask the debtor various routine questions about his or her financial affairs at the 341 Meeting. You will also have a chance to ask questions, but this is not a forum for grilling the debtor extensively. If you do not have an attorney, it might be best to tell the trustee your concerns about the property’s condition, whether the tenant has renter’s insurance, why there always seems to be eighteen people sleeping over, and other such issues. The trustee will then ask the appropriate questions for you.
Make sure you file your Proof of Claim form on time. If you do not file a Proof of Claim, you may be limited to the amount the debtor says he or she owes you, instead of the actual amount.
You may ask for permission to proceed with eviction under some circumstances, especially if you can show that the tenant is endangering the property or using illegal drugs on the premises. Under current law, landlords may also request a lifting of the automatic stay, permission to proceed with eviction, after thirty days have passed from the bankruptcy filing date. The debtor can oppose the request but has some tall hurdles to jump over. The law in this area is extremely technical, and is no time to save money with do-it-yourself, as you could find yourself in severe trouble with the court if you make a mistake. Hire a good lawyer with experience in residential landlord/tenant issues and bankruptcy.
Keep in mind, also, that a tenant in bankruptcy has the right to terminate what are called executory contracts. These are contracts that have continuing obligations, and include leases. In other words, your tenant can cancel their lease without penalty.
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