The Landlord Lens - Bankruptcy

Episode Date: January 14, 2024

In this episode of Be A Better Landlord, we'll tackle the tricky territory of tenant bankruptcy: what it means for you, your property, and your rental income.Don't let tenant bankruptcy blindside you! Join Krista and Jonathan to demystify the legalities, hear practical advice, and equip you with the knowledge to handle this potentially stressful situation with confidence.

I'm Jonathan, this is Krista, and we're here to help you be a better landlord. Today we're going to talk about bankruptcy. Let's start with what is bankruptcy. Yeah, bankruptcy is when you were announcing to the world, your debtors, etc., that you are out of money. You cannot fulfill your obligations and you need some form of assistance. Okay. Not great for landlords. Not ideal.

If a tenant declares bankruptcy. What does it mean if you actually file for bankruptcy? Sure. So when you file for bankruptcy, you are letting the bankruptcy court know that this is going on. There are a couple different types of bankruptcy filings. We don't need to get into them today. But they'll dictate kind of the process, the timeline, et cetera, based on your unique situation and the kinds of debts that you owe. Yeah.

And with these unpaid claims, are they all considered equal? Are they different types? No, there are different types of claims. So there are three types. You've got unsecured claims, which means you have a debt that is not secured, by a specific asset. So that could be like credit card debt. Okay. You've got secured claims, which, as you might have guessed, are actually secured by a physical asset. So this could be like a car loan is secured by the car. And then you have administrative claims. These are claims that

come in after you filed for bankruptcy. So a little bit tricky. You are not supposed to accrue more administrative claims throughout the process of filing. So for a landlord, what kinds of claims could they expect to see from a tenant who declares bankruptcy? Sure. So the most likely type of claim that they're going to see, it's going to fall into two categories. If they owed you rent before they filed for bankruptcy, that's considered an unsecured claim. Once they file for bankruptcy, if they continue to owe you rent, that continued owed rent is going to be an administrative claim. When the bankruptcy courts are looking through these cases, most often administrative claims get paid first along with secured claims because there's some kind of physical asset to take back. Whereas unsecured claims, or in this case, rent that is owed to you from before they filed are going to be paid very last. So makes a little bit more challenging to actually recoup what you are owed. So can a landlord start eviction proceedings after somebody has declared bankruptcy? No. So a tenant declaring bankruptcy is not an evictable situation. It's unfortunate. It's stressful, but it is not something where you can take action.

In fact, usually the bankruptcy courts issue a stay, which means that no one can take action against the tenant or the person who's filing for bankruptcy out of all of their debtors. They need to go through the actual court proceedings with the bankruptcy court to assess who needs to be paid what first and when. So that means you cannot take action against them legally. Wow. And how long can bankruptcy proceedings take? Yeah, it really ranges depending on what type of bankruptcy you're filing. But Chapter 7, which is one of the more popular types that we see with non-corporations, that usually takes four to six months. So that's on average.

It can take shorter, but it can certainly take longer, which means it pays to know the proceedings, have your documentation in order, and just be realistic about what you can expect to get back and give an appropriate amount of effort accordingly. So what if eviction proceedings are already happening when the tenant declares bankruptcy? Ooh, that is such a sticky situation.

So normally I would tell you to go find a real estate attorney and talk to them. In this case, you need to find a creditor's attorney, right? So find a creditor or debtor attorney who can really assess your case and see if you have ground to stand on to try and recoup as much money as possible, what that would look like, the associated cost, because unfortunately, it is a very expensive proceeding similar to the eviction process itself. You're just adding additional costs on top. They'll have some kind of solutions for you, but it's possible that it won't be something that you love. So all this sounds super messy. What can a landlord do to make sure this doesn't happen at all? You know, not to get tenants who are going to declare bankruptcy, but just to avoid any of this

headache. Sure. I mean, you know, life happens and we can't always predict how that shakes out. What you can do, though, is be proactive in your tenant screening. So use something like TurboTenant to go and make sure you understand the person's financial background. If they filed for bankruptcy see multiple times in the past, follow up and ask questions why. See how that's been resolved. You know, that would be a red flag for me as someone screening tenants and really stick to your tenant screening criteria at the end of the day. That's the best you can do because, again, you don't know what tomorrow is going to bring, but you can be prepared and try and do your due diligence ahead of time so you avoid this whole mess and expense. That makes sense. All right, well,

thanks for talking bankruptcies. If you out there have any more questions about bankruptcy or what to do if your tenants declare bankruptcy. Leave them in the comments below. Don't forget to subscribe. TurboTenant is the all-in-one platform for landlords to manage their rental properties. From vacancy to tenancy, we have you covered with industry-leading tools

and expert advice. Landlord better from anywhere for free at turbotenant.com.