When a tenant claims bankruptcy, it can put you at financial risk

What Are Your Rights if a Tenant Claims Bankruptcy?

Owning an investment property can be a successful and fulfilling project. Not only can you own and maintain a piece of property, you can use it to increase your monthly and yearly earnings. However, dealing with tenants isn’t always easy. While most landlords worry about tenants paying rent and taking care of the property, there is another fear all landlords should be aware of. When a tenant declares bankruptcy, it can put you at financial risk. What can you do to protect yourself? Here is what you need to know to protect themselves and their investment.

 Know the Type

Tenants are able to declare two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as a “straight bankruptcy” and allows individuals to discharge large amounts of debt. This debt is typically accumulated through credit cards, loans, and utility bills and is known as “unsecure” debt. Chapter 13 bankruptcy is also known as “reorganization,” and this is when an individual can take their debt and consolidate it in different ways so they can make several years’ worth of payment to debtors. The type of bankruptcy your tenant files will determine how much money you will be able to collect, how long the process will take, and even what legal contact you may have with the tenant during proceedings.

Expect a Stay

While a bankruptcy is being looked over by the court, most judges will award a stay to the tenant. A stay is essentially a block that does not allow any debtor to take legal actions against the individual filing for bankruptcy. During this time you will be unable to obtain unpaid rent through the legal system and you may be unable to evict. You may also be unable to have certain contact with the tenant, including phone calls or importune visits. Most stays do allow you to enter the property for typical maintenance and health and safety checks. An attorney will be able to tell you all conditions of any stay or injunction during the proceedings.

Know What You Can Evict For

A stay can be temporarily lifted and give you the right to evict a tenant under specific terms, one of them being knowledge of illegal action taking place in the property. Illegal drug use and endangering other tenants are both valid reasons to evict even during the bankruptcy process. Always ensure you are informing the court and an attorney about what you are doing and why with official letters.

File your Claim Immediately

If the tenant filing for bankruptcy has not been paying rent and you wish to collect, you will have to file a claim with the court. Your claim letter must include the current balance and proof of that balance. Once proceedings conclude, if there is money available to pay you the court will contact you with a date when you can collect.  

Navigating the bankruptcy process with a tenant can be a difficult and confusing process. However, you don’t have to go through it alone. At AZ Residential Management, we’re here for landlords no matter what’s happening at their properties. Our professional and dedicated team will provide consistent property management and we allow you to professionally and efficiently communicate with tenants about everything payment for maintenance.