From the December 2007 issue of Apartment Law Insider

In the past, tenants who were facing eviction would file for bankruptcy as a last resort, buying time to either work things out with the owner or move. Since the Bankruptcy Abuse Prevention and Consumer Protection Act [119 Statute 23, 2005] came into effect, on Oct. 17, 2005, bankruptcy has had much less to offer tenants who are at risk for eviction.

“Even though the new law has deterred many tenants from abusing the bankruptcy system, these revised bankruptcy provisions have a limited application,” says Manhattan attorney David A. Kaminsky. “They apply only to tenants who have lost their case in a landlord-tenant court eviction proceeding and are facing a ‘judgment of possession,'” adds Kaminsky. A judgment of possession is a court order giving the owner the right to take back the tenant’s apartment.

The revised bankruptcy code gives owners an incentive to be vigilant in tracking tenants who fall behind on their rent. In situations where owners have not started eviction proceedings and the tenant files for bankruptcy, the bankruptcy codes do not apply.

We will review the revised code and the increased protections it offers owners. And we will provide a list of dos and don’ts to minimize your losses when a tenant files for bankruptcy before you have had a chance to initiate the eviction process. Compare this process to the one with which the revised code applies and you will understand why staying vigilant about past due rent is better for you.

Evictions Can Continue if Judgment Is in Effect

The old law provided tenants who filed for bankruptcy immediate protection from eviction in the form of an “automatic stay” — that is, a court order that temporarily stops all collection efforts by creditors.

“Before the bankruptcy code revisions, owners immediately stopped pursuing evictions against tenants who filed for bankruptcy, and bankrupt tenants had free housing until the bankruptcy court released the automatic stay,” says attorney Nathan Hyun.

Under the revised code, if an owner has already filed an eviction lawsuit against a tenant and gotten a judgment of possession, a tenant can no longer file a bankruptcy petition to stop the eviction from going forward, says Hyun. But the code offers some protection for the tenant, he notes.

Even if an owner gets a judgment of possession prior to the tenant’s bankruptcy filing, the owner can be barred from evicting the tenant if the tenant does the following within 30 days of the bankruptcy filing:

  • Certifies to the court handling the eviction that state law would let him pay the owner the overdue rent that caused the owner to initially file the eviction proceeding;
  • Deposits the amount of any rent due with the bankruptcy clerk; and
  • Certifies that he has “cured,” or fixed, the default.Automatic Stay

    When a tenant files for bankruptcy, federal law initiates the “automatic stay” — the bankrupt tenant’s greatest weapon if the owner has not already started eviction proceedings. The stay prohibits creditors from taking any actions to collect, and is automatic because it takes effect the instant the tenant files for bankruptcy. The stay remains in effect until a court “lifts” it or grants permission for you to take specific actions.

    The automatic stay gives the bankruptcy court time to sort out the bankrupt person’s financial affairs and put a value on his property so that he can divide it fairly among his creditors. Owners violate the stay if they sue for back rent, sue for eviction, or take possession of an apartment after bankruptcy has been filed based on debts the tenant ran up before bankruptcy.

    Stiff Penalties for Violating Stay

    Owners who violate the stay, or even threaten to do so, face penalties, including:

  • Payment of the tenant’s legal fees and court costs;
  • Reimbursement of other losses the tenant suffered as a result of your action; and
  • Payment of additional damages; or “punitive damages,” intended to penalize you for violating the law and to discourage future violations.Five Actions You Must Not Take

    Here are five things you must not do while the automatic stay is in effect:

    1)  Don’t sue for damages or eviction. After a bankruptcy filing, you can’t start any kind of lawsuit against the tenant until a court lifts the automatic stay or the bankruptcy ends. Therefore, don’t sue for damages or an order of eviction.

    2)  Don’t demand pre-bankruptcy rent. Even if you don’t sue the tenant, threatening to sue or demanding payment for pre-bankruptcy debt could violate the stay, says attorney Catherine McEwan. Don’t call or write letters to the tenant. Don’t even casually raise, or have someone else casually raise, the topic of unpaid pre-bankruptcy rent in a conversation with the tenant.

    3)  Don’t apply post-bankruptcy payments to pre-bankruptcy rent. Sometimes tenants resume paying rent after they file a bankruptcy case. It is common for owners to credit rent payments against the oldest overdue rent first. But applying a post-bankruptcy payment to rent that was due before the bankruptcy case was filed violates the automatic stay, says New York attorney Jay Hollander.

    Essentially, you would be paying yourself before other creditors have gotten paid, and the automatic stay prohibits that, Hollander says. You must apply post-bankruptcy payments only to rent and charges the tenant ran up after the bankruptcy filing.

    4)  Don’t take security deposit. Don’t treat the security deposit as yours, says Hyun. You may be able to keep it eventually, but you should get permission from the bankruptcy court. “To avoid fines and penalties for violating the automatic stay, it is safer to ask the bankruptcy court to let you apply the security deposit against unpaid rent,” advises Hyun.

    5)  Don’t resort to self-help measures. Don’t change the locks, take the tenant’s property, interrupt services, or otherwise take the law into your own hands. You’ll probably wind up paying punitive damages if you do.

    Four Actions You Should Take

    You can take some steps to protect yourself, including the following options:

    1)  File “proof of claim” for unpaid rent. If you are on the list of creditors, you will get an “Order for Meeting of Creditors Combined with Notice Thereof and Automatic Stay.” The notice gives you basic information about the bankruptcy proceeding, such as the case number, filing date, date of the first creditors’ meeting, and a general description of the tenant’s debts and property

    On the back of the notice is a “Proof of claim” form. Have your attorney fill out the form and file it immediately. The proof of claim form stakes your claim for unpaid rent and other charges the tenant owes you. If you do not file the form, you will not get any rent or charges the tenant owed you at the time of the bankruptcy filing.

    2)  Mention security deposit in your proof of claim. You are in the front of the line of creditors, with respect to the security deposit, says Hyun. But you could lose your place — and the money — if you don’t specifically mention the security deposit in your proof of claim.

    3)  Bill tenant for post-bankruptcy rent. The bankruptcy filing doesn’t cancel the tenant’s obligation to pay rent subsequently, says McEwan. The automatic stay prevents you from collecting, demanding, or suing for pre-bankruptcy debts only. Send a demand letter if the tenant fails to pay rent that becomes due after he files for bankruptcy.

    4)  Get “stay” lifted if post-bankruptcy rent goes unpaid. If the tenant is unable or unwilling to pay post-bankruptcy rent or other charges he runs up after the bankruptcy, you can ask the bankruptcy court to lift the stay. The court is likely to agree to this. You can prove nonpayment of post-bankruptcy rent easily with an “affidavit” — that is, a sworn statement, McEwan says.

    EDITOR’S NOTE: Getting the stay lifted allows you to bring an eviction action. But the order lifting the stay isn’t an order of eviction itself. You will still have to prove to the court in which you bring the eviction case that the tenant should be evicted.

apartmentlawinsider.com orignally published in Apartment Law Insider on December 3, 2007.

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