Leasing to tenants who have gone through bankruptcy can be difficult for landlords. On the one hand, everyone deserves a second chance, and filing for bankruptcy often reflects a difficult period in someone’s life rather than their future potential. As a landlord, you must weigh the risks and rewards of giving someone this opportunity as financial struggles might still be looming that make it harder for renters to pay their monthly rent. Read along with us as this post discusses everything you need to know about leasing to tenants after bankruptcy and other valuable information.
Evaluating Creditworthiness After Bankruptcy Discharge
When it comes to the impact bankruptcy has on your credit, it can, first of all, have a larger negative effect on your credit score than any other financial catastrophe. Even though not all bankruptcies result in a significant decline in credit score—in fact, there is a chance that your score may even go up after filing for bankruptcy—any negative impact makes it more difficult to get credit in the future. Working with a knowledgeable property manager in Delaware County helps protect your rental against possible financial loss.
Another way filing for bankruptcy impacts you is that it stays on your credit record for years afterward, giving prospective lenders a serious red flag over your problematic payment history. The presence of a bankruptcy record on a credit report causes some creditors to reject an application right away.
Since obtaining credit following bankruptcy can be challenging, having a personal relationship with a lender can be very important. It is simpler to have an application accepted when bank personnel, credit union employees, or auto lenders know, trust, and like you.
After filing for bankruptcy, your credit can be restored like it was established initially: gradually and through a track record of timely payments. To aid in the process of restoring your credit score, consider entering into a reaffirmation agreement with one of your creditors if you think you can continue to make payments on an existing debt both during and after bankruptcy.
Bankruptcy Recovery
1. Security Deposit
In a bankruptcy, a trustee can generally demand a security deposit. However, there are restrictions. For example, if a tenant fails to pay rent or causes damage to the property specified in the lease, the landlord may file a lawsuit in court to recover the tenant’s security deposit. As a result, a trustee cannot force a landlord to give up or return a security deposit to the bankruptcy estate on its own while a renter may ask to have her security deposit returned if their landlord files for bankruptcy.
2. Lease Terms
Upon filing bankruptcy, the automatic stay keeps landlords from being allowed to do anything to evict, nor can they demand any payment of pre-bankruptcy rent. This stay stays intact until the lease is rejected or the bankruptcy case is closed.
Under Chapter 7 bankruptcy, the trustee can assume or reject unexpired leases. The assumption would involve curing the defaults, such as any unpaid rent, and assuring future performance by the debtor. In case of rejection of the lease, it will terminate. Hence, the landlords can repossess their property and file claims for damages.
Pros and Cons of Leasing to Tenants After Bankruptcy
Pros
1. The Potential for Reliable Renters
Coming out of bankruptcy, a good tenant will pay rent on time to repair his or her credit score and will be more financially responsible. Nonetheless, tenants who have filed for bankruptcy should be carefully evaluated to ensure the protection of their rental investment.
2. Possibility for Lease Adjustments
Renting out to tenants post-bankruptcy can allow landlords to revisit lease terms and raise rents to the market level, which could attract tenants seeking favorable terms. This reevaluation of the lease agreement conditions improves the process of seeking a new tenant. It also helps landlords reexamine their objectives and consider the state of the market.
3. Legal Protections
The Bankruptcy Code requires the tenant to perform all its obligations under the lease promptly and fully follow the bankruptcy filing until the tenant elects to reject the lease. Although the statute prevents the court from granting any further extension, the bankruptcy court may extend the time for a tenant to perform its obligations under the lease for up to sixty days after the tenant has filed for bankruptcy in certain circumstances.
Cons
1. Risk of Payment Defaults
The tenant who has filed for bankruptcy may be distressed after bankruptcy and may not pay rent or commit further defaults under the lease agreement. A landlord cannot attempt to collect past-due rent or other leasehold obligations as soon as a bankruptcy filing is filed. The tenant can decide whether to “reject” the lease and end up not having to fulfill its duties under it or “assume” the lease and possibly assign it to another party. Effectively, the tenant receives breathing room to decide which leases it wants to stay in and which it wants to leave.
2. Complex Legal Procedure
Bankruptcy is a complex procedure, which could include extended litigation processes; this could hold up the time that would otherwise be taken to enforce compliance with lease terms or collect past-due rent by the landlord. Local and state laws could grant tenants extra rights beyond the reach of federal bankruptcy statutes. You might also have to follow the pattern of state court eviction other than approaching the court for permission to terminate the lease agreement.
3. Restricted Authority Over Tenant’s Choices
One of the most potent weapons afforded to a tenant in bankruptcy is the ability to accept or reject a lease. While an unfavorable lease above market or in a terrible location might be refused, a favorable or below-market lease can be assumed or assigned to another party under the same terms. The landlord can only request that the bankruptcy court grant a shorter period for the tenant to decide than the law stipulates. The landlord cannot compel the tenant to accept or reject the lease. Similarly, the tenant can request that the court extend the time frame for accepting or rejecting the lease.
Final Thoughts
For all parties concerned, including landlords and tenants, filing for bankruptcy may be difficult, drawn-out, and frightening. One of the last things you want as a landlord is for a tenant to file for bankruptcy. This may make it difficult to collect outstanding rent and raise doubts about future rent payments. To keep things from getting messy, tenants must compromise on some things. With the help of the advice mentioned above, knowing what bankruptcy entails for each party, their legal position, and some of the actions landlords and tenants can take before and after bankruptcy.
