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How to Manage Tenant Bankruptcies



Every year, millions of Americans file for bankruptcy. This can have numerous negative repercussions in people’s lives. For rental housing applicants, this can result in being denied housing. For tenants, landlords may elect to not renew leases, impose stricter lease terms, or take other actions. This blog will focus on how landlords should approach bankruptcies, from understanding the different types to managing current tenants who file for bankruptcy.

Understanding the Different Types of Bankruptcies

There are two primary types of bankruptcy filings that landlords should be aware of: Chapter 7 and Chapter 13.

  1. Chapter 7 Bankruptcy: Often referred to as "liquidation bankruptcy," Chapter 7 involves the sale of a debtor's non-exempt assets to pay off creditors. It typically results in the discharge of most unsecured debts, providing a fresh start for the debtor. For landlords, this means the tenant’s financial obligations are wiped clean, but it also means the tenant may have limited resources to pay rent.

  2. Chapter 13 Bankruptcy: Known as "reorganization bankruptcy," Chapter 13 allows debtors to keep their property and pay debts over time, usually three to five years, under a court-approved plan. Tenants in Chapter 13 may have more stable finances than those in Chapter 7, as they are on a structured repayment plan.

Leading Causes for Bankruptcies

Understanding why individuals file for bankruptcy can provide context for evaluating potential and current tenants:

  1. Medical Expenses: Unexpected medical bills are a leading cause of bankruptcy. These situations are often beyond an individual’s control and may not reflect their overall financial responsibility.

  2. Job Loss: Unemployment or significant income reduction can lead to bankruptcy. While job loss can impact rent payment ability, it’s not necessarily a long-term indicator of financial instability.

  3. Divorce: The financial strain of divorce can result in bankruptcy. This may be a temporary situation, and the individual’s financial stability may improve post-divorce.

  4. Overspending: Poor financial management and excessive debt accumulation are other causes. This might indicate a higher risk for landlords if the behavior continues.

Analyzing Bankruptcies During the Screening Process

When screening rental applicants, it’s crucial to handle bankruptcy filings with care. Here are steps to consider:

  1. Evaluate the Full Financial Picture: Don’t automatically decline applicants with a bankruptcy. Look at their overall financial history, current income, employment stability, and credit recovery efforts.

  2. Understand the Context: Investigate the reasons behind the bankruptcy. Applicants who faced temporary financial setbacks may now be in a stable situation.

  3. Check References: Contact previous landlords and employers to get a sense of the applicant’s reliability and character.

  4. Consider a Higher Security Deposit: To mitigate potential risks, you might require a higher security deposit or a co-signer.

Managing Current Tenants Who Declare Bankruptcy

If a current tenant declares bankruptcy, landlords must navigate the situation carefully:

  1. Automatic Stay: When a tenant files for bankruptcy, an automatic stay goes into effect, preventing landlords from taking eviction actions solely for non-payment of rent. Consult with a legal expert to understand your rights and obligations.

  2. Communication: Maintain open communication with the tenant. Understand their intentions and financial plan post-bankruptcy.

  3. Lease Terms: Evaluate whether to renew the lease based on the tenant’s bankruptcy type and repayment plan. You may need to adjust lease terms to protect your interests.

  4. Legal Guidance: Seek legal advice to navigate the complexities of tenant bankruptcies. Ensure you comply with bankruptcy laws and protect your property rights.

Conclusion

Handling tenant bankruptcies requires a balanced approach that considers both the potential risks and the underlying causes of financial distress. By understanding the types of bankruptcies, evaluating the full financial picture of applicants, and maintaining open communication with current tenants, landlords can make informed decisions that protect their investments while offering a fair opportunity to tenants recovering from financial setbacks.

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