Tenant Rights in Bankruptcy
Filing for bankruptcy as a tenant may prevent you from eviction. Bankruptcy provides a means of discarding debt or coming up with a debt repayment plan. However, filing for bankruptcy may not always protect you from eviction. It is always good to contact an Eviction attorney who can help you understand whether bankruptcy is a good choice when you are facing an eviction. The Los Angeles Eviction Attorney is a premium law firm that handles all cases relating to eviction and bankruptcy.
Overview of Bankruptcy
In California, a tenant can file for bankruptcy under chapter 7 or chapter 13. If you file for bankruptcy under chapter 7, you can liquidate all your assets and use the money to pay off creditors. Under chapter 7, you receive an immediate discharge of various debts, but you also face consequences such as poor credit score.
If you seek to avoid eviction, chapter 7 bankruptcy may not be the ideal option for you. Instead, it would be ideal to file for bankruptcy under chapter 13. Chapter 13 bankruptcy is favorable, especially if you have a regular source of income. Unlike chapter 7 bankruptcy, chapter 13 bankruptcy will give you a better chance of retaining your assets, including your home. Under chapter 13 bankruptcy, you propose a debt repayment plan to your creditors that allow you to pay your debts over three to five years.
Under chapter 13 bankruptcy, as long as the court approves the bankruptcy plan, you can retain your home and make payments that match your income over the agreed repayment period. Once a payment plan is approved by the court, you have to adhere to the plan and stay current on all payments. Failure to honor a repayment plan may lead to eviction.
A commercial tenant may file for bankruptcy under chapter 11.
Can Filing for Bankruptcy Help Stop Eviction?
If a landlord gives you the notice to vacate the property, and you fail to comply, the landlord can initiate eviction proceedings in court. The landlord may file for an unlawful detainer lawsuit in court. As a tenant, if you file for bankruptcy before the unlawful detainer filed by the landlord is approved, you are entitled to an immediate automatic stay. An automatic stay is a delay of the landlord's intention to evict you. An automatic stay halts any action against you or your property. An automatic stay stops all the proceedings for evicting you and allows you to stay in your home. However, there are some limitations to the automatic stay:
Filing for bankruptcy by a tenant may stop eviction proceedings. However, there are certain ways in which a landlord can override the provisions of the automatic stay and proceed with eviction:
- The bankruptcy court may lift the automatic stay if the landlord request for relief from the automatic stay and he/she proves qualification for the relief.
- If the court had given a judgment regarding the eviction of a tenant before the tenant petitioning for bankruptcy, an automatic stay might not prevent enforcement of such a judgment.
- The court may dismiss a bankruptcy case if a tenant files for bankruptcy in bad faith or neglects to pay rent.
- Filing for bankruptcy may not prevent a tenant from being evicted if the court establishes that the tenant is not honoring the terms of the tenancy.
Will Filing for Bankruptcy Clear an Eviction Record?
Filing for bankruptcy may help discharge the debt you owe to your landlord. Filing for bankruptcy may also help stop an imminent eviction. However, filing for bankruptcy will not help erase an eviction from your credit record. Information relating to your eviction may be shared with landlords websites.
Rent is an unsecured debt just like medical debt or credit card debt; after filing for bankruptcy under chapter 7, your rent debt may be discharged /forgiven. If you file for bankruptcy under chapter 13, you will get a favorable repayment plan. However, not all debts are discharged after filing for bankruptcy. A landlord may file a lawsuit requesting the bankruptcy court to cancel the discharge of the debt if you intentionally and maliciously damaged the rental property. Although the rent debts may be discharged in bankruptcy, the eviction will still feature on your credit reports. The eviction information will also feature on your background checks.
The landlord has the right to issue information regarding your rent payment problems and eviction status to credit reference bureaus. The negative eviction records may stay on your credit record for as long as seven years. An eviction lawsuit filed by a landlord against a tenant may also be featured in the tenant's credit records.
When offering the property to tenants, many landlords conduct background checks on prospective tenants. Often, landlords hire competent agencies to perform background checks. The background checks are usually very extensive and may be more thorough than credit reports. These background checks will help future landlords know about your prior eviction. Some companies, including major credit bureaus, provide renters screening results. The reports are also called blacklists, and they indicate people whose names feature in housing courts' records nationwide.
Can You Dispute Information on Renters Screening Reports?
The provisions of the Fair Credit Reporting Act apply to both credit bureaus and companies that offer renters screening reports. Upon denial of rental housing due to a negative renters screening report, you have the right to acquire a copy of the report and to know the name of the screening report provider. As long as the information contained in the report is correct and verifiable, the company issuing the report is not liable. However, if you dispute, the information contained in the report as incorrect or if the information is not verifiable, you can sue the company issuing the report to have the information removed.
Can Filing for Bankruptcy Prompt an Eviction?
Filing for bankruptcy does not affect the lease agreement, and the landlord cannot evict you for filing for bankruptcy. To be precise, if you file for bankruptcy under chapter 7, and your rent payments are up to date, you cannot face eviction for doing so.
However, if you file for bankruptcy under chapter 13, your bankruptcy trustee may consider terminating your lease agreement if he believes that is would be beneficial to your creditors. If the trustee establishes that the rent you are paying is much higher than what most individuals in your area are paying, he/she may terminate your lease agreement. This decision would help to free up some money to pay creditors and reduce your expenses. The trustee may consider terminating your lease agreement even if you have not violated the terms of the lease agreement.
Can You Lease or Buy a Home After Filing for Bankruptcy?
Most tenants may fear that by filing for bankruptcy, they may never become homeowners in the future, mainly due to the inability to access lending. This is not true, as you can still own home even after filing for bankruptcy. However, you have to be patient, as you may have to stay for several years before you qualify to access financing.
In California, you may take up to four years after filing for bankruptcy to qualify for private lending to acquire a home. The waiting period may be as short as one year if you can qualify for government homeownership funding. In the period after bankruptcy, you may focus on rebuilding your credit score.
As much as bankruptcy may affect your credit, failing to file for bankruptcy will still negatively affect your credit score due to the inability to repay rental debts. If you fail to file for bankruptcy and attempt to seek alternative housing, prospective landlords will see your unpaid debts on your credit report and deny you a house lease. Landlords know that once you file for bankruptcy, you may not qualify for bankruptcy again. Therefore, prospective landlords will know that you cannot discharge the debt owed to them; even when you fall behind on rent, the landlord will still be able to recover the debt owed to him/her. Therefore, filing for bankruptcy will not hinder you from leasing or buying a home in the future.
Back Rent After Bankruptcy
If you are thinking of filing for tenancy bankruptcy, you may not be sure about dischargeable debts and the ones that are not. Most people assume that back rent is not dischargeable in bankruptcy. However, after filing for bankruptcy, back rent can be discharged as an unsecured debt. Just like credit card bills, medical bills, and personal loans are dischargeable, so can your back rent. In some rare cases, back rent may be treated differently from other unsecured debts.
In most cases, however, the rent is dischargeable. When filing for bankruptcy, the law requires you to disclose that, you owe money to your landlord. Bankruptcy requires you to make a list of all your creditors, and the landlord is one of them.
How a Landlord Learns About a Tenant Bankruptcy
When a tenant files for bankruptcy, it is the responsibility of the bankruptcy trustee to notify the landlord. The landlord receives notice as he is one of the creditors. He/she may receive a notice about the first meeting of creditors if it is to take place. The landlord may also receive a notice that a creditors' meeting will not be held unless a creditor requests for a meeting.
After notification of the tenant's bankruptcy, the landlord has to file a Proof of Claim with the trustee in bankruptcy. The landlord should calculate all the rental arrears outstanding. The landlord may identify a part of their claim as a preferred creditor and the rest as an unsecured creditor. The landlord may attend the first meeting of creditors if it takes place. One the trustee liquidates the tenant's assets, he/she pays the creditors in the order of their ranking.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act
The 2005 Bankruptcy Abuse Prevention and Consumer Protection took effect on October 17, 2005. The congress passed the act, and then-President Bush signed the act in April 2005. The act was a major reform of the bankruptcy system. The act changed the bankruptcy system in several ways, including tightening the bankruptcy eligibility criteria. The act makes it easy for landlords to evict bankrupt tenants from their properties.
Provisions of the Act
Under the October 17, 2005 bankruptcy act came into effect, persons wishing to file for bankruptcy under chapter seven have to meet some eligibility requirements often known as the means test.
According to the act, a tenant whose current monthly income is lower than the state's median income may file for bankruptcy under chapter 7. However, if a tenant can afford to make monthly debt payments of one hundred dollars ($100), and whose monthly income is above the state's median income cannot file for tenancy bankruptcy under chapter 7. Instead, such a tenant has to file for bankruptcy under chapter 13.
In evaluating a tenant's ability to pay $100, or six thousand dollars ($6,000) over five years, a formula that considers the tenant's total debt, monthly expenses, and monthly income are adopted.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a tenant cannot file for bankruptcy under chapter 7 or chapter 13 if he/she is a tax defaulter. When filing for bankruptcy, a tenant may be required to show proof of their income and provide federal tax returns for the previous year. If the tenant has defaulted tax payment for the previous year, he/she must first pay outstanding taxes before the bankruptcy process can commence.
The Act may also require tenants filing for bankruptcy to undergo some form of credit counseling. The counseling has to take place in a government-approved program. Once the bankruptcy proceedings are complete, but before the tenant's debts are discharged, the tenant may have to take part in a government-approved training program on financial management.
It is common for tenants facing financial constraints to declare bankruptcy. The steps a landlord takes while evicting a tenant may vary depending on if the landlord had sought possession of the rental in court before the tenant filed for bankruptcy:
Tenant Bankruptcy After Landlord Wins Possession
If a landlord sues a tenant, request for eviction, and wins a judgment for rental property possession before a tenant files for bankruptcy, the landlord may go ahead and evict the tenant. The tenant cannot stop the eviction even if he/she files a petition for bankruptcy and attempts to halt the process of eviction. Under the old bankruptcy law, tenants would still stop the eviction by filing for bankruptcy at the last minute. Under the current law, a landlord can request the bankruptcy court to lift the automatic stay and proceed with the eviction.
Some states are exceptional, especially when handling bankruptcies resulting from an inability to make monthly rent payments. By filing a certification, paying both forward and back rent, a tenant can still file bankruptcy at the last minute and stop an eviction. However, a landlord may still object to the tenant's certification and secure a hearing session in court. If the landlord can prove to the court of the invalidity of the tenant's certification, the court may lift the automatic stay and advise the landlord to proceed with the eviction.
Tenant Bankruptcy Before Landlord Wins Possession
If by the time a tenant applies for bankruptcy, the landlord has not won possession, the landlord cannot deliver a termination notice to the tenant or initiate an eviction. The landlord cannot evict the tenant even if the tenant fails to pay rent or he/she violates other terms of the landlord-tenant agreement. After filing for bankruptcy, a tenant enjoys an automatic stay that can only be lifted if the landlord goes to court to have the tenant's automatic stay uplifted.
However, in some instances, a landlord may still be able to conduct a successful tenant eviction even if the tenant petitions for bankruptcy before the landlord wins possession. For instance, if the tenant is using unlawful products and drugs and engendering the occupied rental property, a landlord can evict him/her even after the tenant petitions for bankruptcy. In this case, the landlord will not have to request the court to lift the tenant's automatic stay before initiating the eviction. Instead, the landlord prepares a certification that outlines that the tenant has used prohibited drugs in the property or damaged/endangered the rental property. The land may also file the certification if the tenant hosts guests who use drugs or endangers the property.
If the tenant does not object to the eviction notice after fifteen days of receiving the notice, the landlord can proceed with the eviction. The bankruptcy court may hold a hearing if the tenant files an objection against the eviction notice.
Even if the tenant is not behind in rent payments, and has not violated the lease agreement, filing for bankruptcy may affect the tenancy. Upon filing for bankruptcy, the bankruptcy trustee may terminate the lease or let the tenant keep the house. If the trustee decides to let the tenant keep the house, a landlord has the right to request the court for a proof of the tenant's ability to pay future rent even if the tenant has no history of rent default. If the tenant is unable to pay rent at a future date, the landlord can always request the court to lift the automatic stay and then terminate the lease and possibly evict the client.
What a Landlord Should Know
Whether a tenant has filed for bankruptcy under chapter 7, chapter11, or chapter 13, as a landlord, you are entitled to any rent that accrues after the filing. The rent that accrues during this period counts as an administrative expense and must receive high priority of payment. To recover rent or other amounts that fall due after a tenant files for bankruptcy, landlords have to file timely claims with the Bankruptcy court.
A landlord should promptly serve the tenant with a notice to pay rent or quit. Under bankruptcy law, if a landlord's notice to pay rent or quit expires before a tenant files for bankruptcy, the lease is automatically terminated, and this accords the landlord a quick relief from stay.
Where a commercial lease exists, after the tenant files a petition for bankruptcy, the bankruptcy trustee has up to 120 days to either reject or assume a commercial lease. If the tenant files for bankruptcy under chapter 13, the trustee may have up to 120 days after the court confirms a reorganization plan. During this period, if the trustee assumes the commercial lease, the tenant continues occupying the tenancy.
However, if the trustee feels that rejecting the lease may be beneficial to the tenant's creditors, he/she may recommend an alternative lease to the tenant. A trustee may recommend an alternative lease if the tenant is paying outlandish rent and may access more affordable leases that may help free some income to pay creditors. The court may extend the 120 days and give the bankruptcy trustee an additional 90 days to make the decision. Any further extension after the extra 90 days would require approval from the landlord.
If a tenant files for bankruptcy under chapter 7, he/she will have up to 60 days to either reject or assume the lease for residential property.
The law requires the bankruptcy trustee to perform all the non-monetary agreements and covenants under the lease unless it is impossible to fulfill the covenant. If a trustee is unable to fulfill the lease covenant, the landlord may be entitled to damages resulting from the breach of the covenant. If you have any questions please call our Los Angeles eviction lawyer today for a free consultation.