How Does A Tenant's Bankruptcy Interfere with Your Eviction?

By Atty. Gary D. Koch of Petrie + Pettit S.C.

A tenant's filing of a bankruptcy, whether it is a Chapter 7 or a Chapter 13, stops your eviction cold under most circumstances!

Evictions are typically matters handled exclusively through the state court system, in whichever county the property is located. Every now and then, though, we have to make a trip to federal court to assist a landlord. This most frequently arises when a tenant files for bankruptcy protection.

Bankruptcy is authorized by the United States Constitution and is codified in Title 11 of the United States Code. There are 15 “chapters” of code, but the most common of those in this context are Chapter 7 and Chapter 13. The bankruptcy protections provided by filing under either chapter are extremely powerful, and can stop an eviction in its tracks.

Chapter 7 bankruptcies are relatively short-lived. The filing of a Chapter 7 bankruptcy creates an automatic stay of any action to collect on a debt, including past-due rent, or to continue any action to recover an interest of the “bankruptcy estate”, which includes the tenant’s right to continued occupancy of the rented premises. Chapter 7 bankruptcies are typically open for four to six months before the case is closed. If the case results in a “discharge,” most debts which existed at the time of the filing are wiped out. Rent incurred before the case was filed is generally discharged in a Chapter 7 bankruptcy.

Chapter 13 bankruptcies usually run for a much longer duration. These bankruptcies may repay some amount of the existing debt to creditors, but do so over a 3 to 5 year period. The filing of a Chapter 13 bankruptcy also creates an automatic stay against collection or recovery.

There are a few exceptions to the automatic stay. Most relevant to a landlord, is that if a judgment of eviction is entered by the state court before the bankruptcy is filed, the landlord can still execute the writ and remove the tenant from the property. Be aware, however, that there is an exception to this exception, so there are limited circumstances when even a previously granted judgment of eviction is halted by a bankruptcy filing!

In all other circumstances, whether a Chapter 7 or a Chapter 13 is filed, in order to move forward with an eviction action, including serving a notice terminating the tenancy, the landlord will need permission from the Bankruptcy Court to do so. We obtain this permission by filing a Motion to Lift the Automatic Stay.

For Chapter 7 bankruptcies, the process of obtaining a lift of the stay requires a specific basis to file and may take as long as the life of the bankruptcy itself, so doing so may be an exercise in futility. Once the Chapter 7 discharges, dismisses or closes, the landlord can proceed against the tenant for any debt incurred after the date the Chapter 7 case was filed. Lifting the stay may allow the landlord to begin the process a few weeks earlier than the end of the bankruptcy.

For Chapter 13 bankruptcies, though, given their much longer duration, lifting the automatic stay is a viable option for the landlord. There need to be grounds for the motion, such as failure of the tenant to pay rent after the filing of the bankruptcy. The Bankruptcy Court will also likely give the tenant a “second chance” with the first motion, and order that any rental arrears incurred after the date the case was filed be included in the repayment plan, but may also order that any future missed rent payments will result in an immediate lifting of the stay.

Evictions are complicated enough, but when you add in a bankruptcy as well, navigating both the state AND federal courts becomes a minefield. 

By Atty. Gary D. Koch of Petrie + Pettit S.C.

Screening Prospective Tenants Is a Must --- That Includes Commercial Tenants

Those of you that have attended my seminars or read prior blog posts of mine are well aware that in my opinion screening prospective tenants is the single most important part of landlording.

These sentiments apply to commercial tenants as well as residential tenants. Just because your tenant is a corporation, LLC or some other business entity does not make make them legitimate.

A corporate tenant can also fail to pay rent, damage your property, and otherwise be a nightmare. In fact some tenants can hide behind an empty shell of a corporation (or partnership or LLC) and actually turn out to be a commercial tenant from hell.

I was recently interviewed by Colleen Henry of Ch. 12 News about one such "professional" tenant from hell. This tenant moved her business into her landlord's rental unit and refused to move out even though she had not paid rent for months. She bounced her check for the security deposit. She bounced her check for the 1st month's rent. She refused to make any other rental payments. She ignored her landlord's pleas to pay rent or move. Once her landlord began the process to evict her, she filed bankruptcy. By doing so all creditors, including her landlord, were precluded from attempting to collect from her (including the filing of an eviction action against her) until they received permission from the bankruptcy court. And this wasn't the first landlord that this tenant did this to. She had done this to landlords before.

Tenants such as this one make good landlords want to get out of the business.

My recommendation to landlords who are or have been in this difficult situation is not to give up and get out of the business but rather take the time to educate yourself about landlord tenant law so that you are better equipped to handle such a situation in the future. Chances are the better educated you are the better chance that you will not rent to the tenant from hell because you will have learned enough to know that you ALWAYS, ALWAYS must screen your tenants before signing a lease and/or handing them the keys to your property.

What Is The Effect On The Eviction Process If A Tenant Files Bankruptcy?

I have had a number of people ask me over the last several months to address what effect a tenant filing bankruptcy has on the eviction of that tenant. I have been delaying writing that blog post and I apologize for that. Bankruptcy is a tricky area of the law, and I am by no means an expert in bankruptcy law, but I will attempt to provide you with a general summary of how a tenant filing bankruptcy effects a landlord's attempt to evict that tenant.

Once an individual files bankruptcy (which I will refer to as "BK" for short to prevent having to type the word "bankruptcy" 25,000 more times during this post) all creditors of the debtor (person filing BK) are "stayed" from pursuing the debtor for repayment of any monies owed. This is referred to as the "automatic stay" and is specifically addressed in Title 11 of the United States Code (U.S.C.) at section 362. The automatic stay applies whether the individual files for BK under Chapter 7 (liquidation) or under Chapter 13 (reorganization).

There are some exceptions, but for the most part, the "automatic stay" prevents any creditor from attempting to collect a debt from the debtor. Before a creditor can pursue the debtor for money owed the automatic stay must be "lifted" by the BK court. So, essentially, you must get permission from the BK court before you can attempt to collect.

The need to seek permission from the BK court applies to a landlord that has not been paid rent by his/her tenant, if the tenant has filed for BK, as well. Practically speaking, this means that a landlord cannot telephone a tenant to ask when they are going to pay rent that is owed, a landlord cannot draft and serve a 5 Day Notice (or a 14 Day notice) on a tenant, a landlord cannot file an eviction action against a tenant, if the tenant has filed for BK.

As many of you who have already gone through the eviction process well know, the entire process can take anywhere from several weeks to months to complete. All the while you have no rent coming in. If your tenant has filed BK, the process will take even longer.

In order to "lift" the automatic stay, a landlord must file a Notice of Motion and Motion To Lift The Automatic Stay with the BK court. There is a filing fee that must be paid. The tenant/debtor then has a period of time in which to reply to the motion. Next, a hearing will be scheduled on the motion. This hearing is typically not even scheduled until after the time has passed for the tenant/debtor to reply to the motion, then due to the BK court's heaving calandar, the hearing will often be scheduled out several weeks into the future.

In the motion, and at the hearing, the landlord will need to set forth the pertinent facts and law and ask the BK court to lift the stay in order to allow the landlord to serve the tenant with a notice to pay or vacate, and if needed, follow that up with the filing of an eviction. There are various scenarios that can play out at the hearing -- too many to address in this post. Oftentimes, if the BK court determines it is feasible, the BK court will attempt to broker a deal if the tenant/debtor wants to continue to reside in the unit -- this often entails the landlord being strongly persuaded to allow the tenant/debtor to continue residing in the rental unit in exchange for the tenant/debtor agreeing to reimburse the landlord for past due rent via a payment plan.

One exception to the automatic stay that can greatly help landlords, is if the landlord has already obtained a judgment of eviction against a tenant, prior to the tenant filing BK, then the automatic stay does not apply and the landlord is allowed to execute the writ with the Sheriff and have the tenant removed from the rental unit (11 U.S.C. Section 362(b)(22)). In order for this exception to apply, the judgment of eviction must already have been granted prior to the tenant filing BK. If no judgment of eviction has been entered, then it is irrelevant whether or not the landlord has already served the 5 Day Notice, filed the eviction lawsuit, had the eviction lawsuit served on the tenant, or already appeared in court ---- the automatic stay will still apply.

It should also be noted that if a landlord has obtained a judgment of eviction prior to the tenant filing BK, this only allows the landlord to proceed with the execution of the writ. It does not allow the landlord to pursue the tenant for money owed (what is often referred to in Milwaukee County as the 2nd and 3rd casues of action). If a landlord wishes to obtain a money judgment against the tenant/debtor, s/he would still need to seek relief from the automatic stay from the BK court.

As you can see, a tenant's BK filing can have a HUGE impact on a landlord's ability to evict a tenant and recover possession of the rental unit. Once a tenant has filed for BK, a landlord must stop all attempts at collecting past due rent from the tenant or evicting them. Failure to abide by the automatic stay can result in a landlord being sanctioned by the BK court and if a landlord "willfully" violates the automatic stay, the injured party (the tenant/debtor) can recover actual damages from the landlord, including court costs and attorney's fees, as well as punitive damages.