People experiencing financial hardship typically file for bankruptcy under either Chapter 7 or Chapter 13 of the United States Bankruptcy Code. Each chapter has its own implications for residential leases:
Chapter 7 Bankruptcy: Liquidation
In a Chapter 7 bankruptcy, the debtor’s non-exempt assets are liquidated to pay off creditors. Residential leases are considered executory contracts, meaning both parties (tenant and landlord) have ongoing obligations. The tenant must decide whether to assume or reject the lease within a specific timeframe. If the tenant assumes the lease, they must cure any defaults and continue making regular payments. If they reject it, the lease is considered terminated.
Chapter 13 Bankruptcy: Repayment Plan
Chapter 13 bankruptcy involves creating a repayment plan to settle debts over a specified period, usually three to five years. Residential leases are also treated as executory contracts in Chapter 13. Similar to Chapter 7, tenant/debtors must choose to assume or reject the lease within a designated timeframe. Assuming the lease requires the debtor to make regular payments and cure any defaults through the Chapter 13 plan.
Automatic Stay and Landlord Rights
When a tenant files for bankruptcy, the automatic stay is triggered. This of course halts most collection efforts, including and especially eviction proceedings. The landlord cannot take any action to recover possession of the property, collect unpaid rent, or enforce lease terms during the automatic stay. This provides temporary relief to the tenant.
However, there are exceptions to the automatic stay. Landlords can seek relief from the stay, especially if the tenant is damaging the property or engaged in illegal activities. Additionally, if the tenant fails to pay post-petition rent, the landlord may request permission from the bankruptcy court to pursue eviction.
A Word on Security Deposits
The treatment of security deposits depends on the bankruptcy chapter and the tenant’s decisions regarding the lease:
Chapter 7 Bankruptcy:
If the tenant assumes the lease, they must provide adequate assurance that they will fulfill their obligations. In this case, the security deposit may be retained by the landlord. If the tenant rejects the lease, the security deposit becomes an unsecured claim, and the landlord may receive only a portion or none of it.
Chapter 13 Bankruptcy:
Similar to Chapter 7, the treatment of security deposits depends on whether the tenant assumes or rejects the lease. If the lease is assumed, the security deposit may be used to cure defaults and continue the lease. If the lease is rejected, the security deposit becomes an unsecured claim.
Should you need to consult an attorney to file bankruptcy, please contact one of our lawyers at Winslow, McCurry & MacCormac at (804) 423-1382.
