A Chapter 13 bankruptcy allows a debtor (the person who files the case) to pay past due debts through a three- to five-year repayment plan. However, if a tenant owes you back rent and files a Chapter 13 case, you won’t have to wait years to get your money. The waiting period will depend on whether a lease is still in force, whether the tenant wants to keep the lease, and the steps you’ve taken to evict if any.
In this article, you'll learn about the Chapter 13 bankruptcy process, how the automatic stay stops collection activities, and how to ask the court to lift the automatic stay to allow you to collect rent or resume eviction proceedings.
The Chapter 13 Bankruptcy Process
Once the Chapter 13 case is filed, the court will appoint a bankruptcy trustee to administer the plan, accept monthly repayment plan payments from the "debtor" or filer, and distribute the funds to creditors who file valid claims. If the lease hasn’t expired, the trustee has the right to take it over, "assume" it, or reject it. The trustee must decide by the time the court formally approves or "confirms" the plan.
Chapter 13 trustees rarely have an interest in a debtor’s residential lease and will routinely reject it. Once rejected, the debtor has the option to make the same choice. If the debtor chooses to reject it, the lease is terminated.
- If the lease gets rejected. The tenant will owe any unpaid past-due rent and damages under the lease terms. You’ll have to file a proof of claim form with the court detailing the debt to recoup any of that money. The amount you recover will depend on the filer’s debts (priority debt gets paid first) and the amount available to pay claims.
- If the lease gets assumed. If the debtor or the trustee assumes the lease, that person must cure any default “promptly.” Most debtors will include the owed amount in their plan to be paid along with the other creditors over three to five years. You can challenge that payment schedule by filing an objection to the plan and arguing that “promptly”—as used in the bankruptcy code—means something less than the plan's term.
Your Tenant and The Automatic Stay
If the rent is current when the tenant files the Chapter 13 case, you won’t have to do much unless the tenant or the trustee rejects the lease. However, when your bankrupt tenant owes you rent, you have to be careful how you interact so that you don’t run afoul of the automatic stay, an injunction (order) that prohibits you from taking certain actions to collect past due rent without court permission.
Actions you’ll want to avoid include:
- phone calls and letters demanding payment of past due rent
- personal visits requesting payment
- filing an eviction suit, and
- using a deposit for past-due rent.
The automatic stay doesn’t prohibit all contact with the client. You’ll still be able to do the following:
- issue current rent statements
- enter into a new lease
- require health and safety compliance
- issue current rent reminders
- charge a late fee, and
- conduct routine maintenance or pest control services.
The consequences of violating the automatic stay can be steep and could result in the court awarding your tenant "damages" or money.
Evictions and Chapter 13 Bankruptcy
Whether you can evict your tenant will depend on where you are in the collection process when the tenant files for bankruptcy.
You received an eviction judgment before the bankruptcy. Let’s say your tenant stopped paying rent, and you filed an eviction suit. Then, you receive a notice from the court that the tenant filed a Chapter 13 case. Your eviction suit isn’t necessarily dead in the water. If you received a judgment for possession before the tenant filed the bankruptcy case, in most states, you could move forward with the eviction because the automatic stay won’t apply. There is an exception, however. A few states grant the tenant the right to cure a money default even after the court issues the judgment for possession. To claim that right, the tenant must file a certification and deposit with the bankruptcy court the rent that will come due in those first 30 days of the bankruptcy. Then, the tenant has until the end of those 30 days to file a second certification and pay all past-due amounts. If the tenant fails any step, you can move forward with the eviction.
You didn’t receive an eviction judgment before the bankruptcy. If you want to evict after the tenant files a Chapter 13 case, your first stop is the bankruptcy court to ask the judge to lift the automatic stay. But you can skip that step if you’re evicting the tenant because of illegal drug use on the property or if you learn that the property is otherwise endangered. To facilitate the eviction, you will file a certification with the court explaining the circumstances, but you won’t have to delay the eviction while a motion to lift the stay is pending.
Consult a Bankruptcy or Eviction Lawyer
You'll likely want a non-paying tenant off your property as quickly as possible and to recoup any funds possible. In this instance, consider meeting with a bankruptcy attorney and an eviction lawyer to determine your rights.