What Every Landlord Should Know When a Tenant Files a Bankruptcy Petition
The filing of a bankruptcy petition by a tenant will alter the landlord tenant relationship. Specifically, the filing of a petition will affect a landlords rights as it relates to evictions, and the collection of rents that are in arrears. A violation of the bankruptcy rules by a landlord carries significant penalties, and therefore, any action by a landlord subsequent to the filing of a petition must be addressed with deliberate care.
The Automatic Stay
In general, under the Bankruptcy Code, the filing of a petition will operate as a stay of certain actions against a Petitioner. 11 U.S.C 362 (a)(1) states that the filing of a petition operates as a stay of “the commencement or continuation, including the issuance or employment of process, of a judicial administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.” Further, 11 U.S.C 362 (a)(3) also stays “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estates.” Consider a scenario in which a Creditor had the option to bring an action against a Debtor, but failed to do so. If the Debtor then files a bankruptcy petition, the Creditor is estopped from bringing that action that could have been brought prior to the filing of the Creditor’s petition. Basically, no collection efforts or eviction may continue after the filing of a petition. However, within the code there is an exception under 11 U.S.C 362 (b)(22).
No Automatic Stay
While the filing of a petition operates as a stay pursuant to 11 U.S.C 362 (a), the stay is not trigged pursuant to 11 U.S.C 362 (b)(22). 11 U.S.C 362 (b)(22) states that the filing of a petition does not operate as a stay “subject to subsection (l), under subsection (a)(3), of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” In the scenario above, let us substitute the Landlord as the Creditor and a Tenant as the Debtor. Under 11 U.S.C 362 (b)(22), the automatic stay that applies to the Creditor, would not apply to a Landlord in an eviction proceeding where there has been a judgment of possession. This is a key distinction, since the automatic stay under 11 U.S.C 362 (a) applies to the commencement or continuation of an action, while 11 U.S.C 362 (b)(22) only provides an exception for the continuation of eviction proceedings where the Landlord has been granted a judgment of possession against the debtor/tenant, prior to the filing of a bankruptcy petition and a specified certification has been filed.
Still there is an exception to 11 U.S.C 362 (b)(22). As stated above, 11 U.S.C 362 (b)(22) is subject to subsection (l), which states that subsection (b)(22) “shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury.” That certification must state the debtor has the ability to cure the entire monetary default giving rise to the judgment of possession, and that the debtor has deposited with the clerk of the court, any rent due during the 30-day period after the filing of the bankruptcy petition. See, 11 U.S.C 362 (l)(1)(A)(B). Further, 11 U.S.C 362 (l)(2) allows the automatic stay to remain in place should the debtor file an additional certification that the debtor has cured the entire monetary default that gave rise to the judgment under which possession was sought by the lessor.
Finally, should a debtor indicate in his petition that there was judgment for possession of the residential property in which he or she resides, but failed to file the required certification, then the (b)(22) exception shall immediately apply. Further, 11 U.S.C 362 (l)(5)(A) requires that the debtor indicate in his or her petition papers the name and address of the lessor, when a judgment of possession of residential property has been obtained prior to the filing of the bankruptcy petition.
Consider a scenario in which we have cotenants and one party has filed for bankruptcy before a judgment of possession has been granted to the landlord/lessor. Under the bankruptcy code, the landlord would be estopped from proceeding against that tenant, however, the landlord could proceed against the non-filing cotenant, since he or she remains liable under the rental agreement.
Penalties for Violations-
The potential penalty for violating an automatic stay will vary depending on whether that violation was willful. In addition, if a violation is found, the violator could be subject to paying for attorney fees and other damages. In a landlord tenant situation, if a landlord evicts a tenant when the 11 U.S.C 362 (b)(22) exception did not apply, a court may require the tenant be reinstated to the property.
At Griffin Alexander, P.C., our team has extensive experience representing landlords, apartment and property owners in complex issues with residents.
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The information in this Client Alert is provided solely for information purposes. It should not be construed as legal advice on any specific matter and is not intended to create an attorney-client relationship. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based upon particular circumstances. Each legal matter is unique, and prior results do not guarantee a similar outcome.
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