When Will a Bankruptcy Case Prevent Eviction of a Residential Tenant?
Bankrupt tenants can certainly complicate a landlord’s life. Fortunately for the landlord, the rules of eviction when a tenant files for bankruptcy have gotten a bit easier.
Bankruptcy’s Automatic Stay
When someone files for bankruptcy, an injunction called the automatic stay goes into effect immediately, for most cases. The automatic stay prohibits creditors, including landlords, from initiating or continuing most collection actions against the person who filed the bankruptcy.
The federal Bankruptcy Code includes a number of exceptions to the automatic stay, one of which is designed to benefit landlords that are ready to oust a tenant. How and when a landlord can proceed with an eviction after a tenant files a bankruptcy case turns on whether the landlord obtained a judgment of possession before the bankruptcy case was filed.
Here are three examples to illustrate how the automatic stay affects evictions at various stages.
Tom, a tenant, has not been paying rent according to the terms of his lease. In fact, Tom has not been paying many of his bills. He visits an attorney and decides to file a Chapter 7 bankruptcy case. Larry, the landlord wants to evict Tom, but Larry had not filed his summary eviction proceeding by the time Tom filed his Chapter 7 case. Larry is not out of luck. However, he will have to file a motion in bankruptcy court that seeks to lift the automatic stay so that he can commence the eviction proceeding.
What if Larry had just filed his summary eviction proceeding when Tom filed his Chapter 7 petition? Although Larry won the race to the courthouse, the automatic stay will prevent Larry from going forward with the eviction. That is, he must cease any further eviction proceedings while he petitions the bankruptcy court for a lift of the automatic stay, which, if granted gives him permission to carry on with his summary proceeding. Once that permission is granted, usually within 30 days of filing the motion, the court will enter an order lifting the stay and Larry will be free to pursue eviction.
Finally, we take it one step further. Larry files his eviction proceeding and obtains a judgment of possession from state court before Tom files his Chapter 7 bankruptcy case. Once Larry has the judgment of possession, he is no longer required to seek permission from the bankruptcy court before he can proceed to execute on the judgment and force Tom out of the apartment.
The Automatic Stay and Other Collection Activities
Once an automatic stay is in place, it will also prohibit a landlord from taking other collection actions, including issuing a notice of termination, sending a demand for payment of a debt that pre-dates the bankruptcy or calling the tenant demanding payment.
Exceptions for Drugs and Property Damage
However, what if Tom, the tenant is engaging in illegal activities or destroying property? The bankruptcy code makes an exception for situations in which the renter is using illegal drugs or endangering the property. In that instance, Larry can prepare a certification to be filed with the bankruptcy court and served on the tenant describing the objectionable activity. Once filed, the tenant has 15 days to respond. If Tom files no response, Larry can proceed with eviction. If Tom files a response, the bankruptcy court will hold a hearing to determine if the landlord can proceed.
Penalties for Violating the Automatic Stay
The automatic stay is similar to an injunction and thus, a landlord violates the stay if he sends collection letters and notices to a tenant in bankruptcy and/or if he continues with an eviction proceeding before he has a judgment of possession from state court or an order granting a lift of the automatic stay. from bankruptcy court. The penalties for violating the stay can be severe and can range from a small fine up to a large fine and loss of the right to evict.
If you are a New York or New Jersey landlord faced with a bankrupt tenant, contact the offices of Griffin Alexander P.C. We focus on landlord/tenant law in New Jersey and New York. We can help you determine the best way and the right timing to gain possession of your property when a tenant files bankruptcy. Contact us as soon as possible! We can help!