Tenant bankruptcy can be one of the trickiest challenges for property managers. Evicting the tenant in question is not as straightforward as a standard eviction for non-payment, and it also makes it more difficult to recover rent.
So what can you do when a tenant files for bankruptcy? And more to the point, how can you safeguard your and your landlord’s interests?
Understanding the “automatic stay”
When a tenant files for bankruptcy, all further collection efforts and eviction proceedings are automatically stopped until the court dismisses the case or grants relief. This process can take four to six months, and if a property manager still tries to collect rent or evict the tenant, they risk penalties.
However, property managers can petition the court for relief from the stay in proceedings if the tenant damages the property or fails to pay post-bankruptcy rent after assuming the lease.
What happens to the lease?
Tenants who file for bankruptcy must decide within 60 days to assume (continue) or reject (give up) their lease.
If the tenant decides to continue the lease, they must demonstrate their ability to pay rent going forward. If rejected, the lease is liquidated as part of the bankruptcy estate, and unpaid rent may be harder to recover.
You and your tenant can mutually agree to end the lease early, but be prepared for the possibility that you may not recoup all unpaid rent unless the court includes it in a repayment plan.
Bankruptcy-proofing your business
You can minimize the financial impact of a tenant bankruptcy with a little proactive planning:
- Keep three to six months’ expenses in reserve
- Look out for past evictions or bankruptcies in tenant screening reports
- Use tools like PayProp to stay on top of payments and arrears before they escalate
Tenant bankruptcy is a challenging curveball, but knowledge of the legal position and the right strategies will keep your business on solid ground.
