Bankruptcy: Did the Tenant Really File?

by Richard Marmor, Esq.
AZSA Legal & Legislative Chair

Let’s make one thing very clear from the outset. If you have any reason to think that your tenant might have filed bankruptcy, stop all efforts to collect his debt. At the instant of filing, an automatic court order is issued called a “stay,” commanding all creditors to cease all debt collection activities against the bankrupt person. If you proceed anyway, perhaps making collection calls, or worse, continuing with an auction process, you would therefore be violating a court order and could be in store for some very serious penalties.

How could you know if a tenant has filed?

Usually you will receive a formal notice from the bankruptcy court advising of the filing. The problem is that it often takes time following a bankruptcy filing for such notices to go out. As a result, you often will first learn of a bankruptcy filing from the tenant, who simply tells you that he has filed. Importantly, that kind of verbal notice has been considered by bankruptcy courts to be enough notice to warn you as a creditor that an automatic stay order is in place.

The first thing you should do

Understand that as of the moment a tenant files for bankruptcy, you have a new tenant: the Bankruptcy Estate of Tenant. Any money your tenant owed you prior to the moment of filing is a debt from what is now your previous tenant, and is included in the bankruptcy. Your new tenant, the Bankruptcy Estate, is now storing at your facility and technically owes rent while it’s doing so, from the moment of filing until the bankruptcy is discharged. Don’t count on collecting any of it though. You have to ask the bankruptcy court to order its payment – good luck – and you cannot use collection efforts or foreclosure to collect it. But keep track anyway. If the bankruptcy drags on for a very long time – sometimes years – going to court to collect that could be well worth the effort.

Did the tenant really file for bankruptcy?

You’ve been preparing for an auction, cutting locks, sending out the required legal notices, etc., and your tenant calls you and says that he filed bankruptcy. Did he? Or is this merely a ploy by a clever tenant to stymie your auction process? Either way, stop! The consequences to you are potentially so severe if you proceed anyway and it turns out that the tenant really did file, that it doesn’t pay to take a chance. When your tenant tells you of the alleged filing, ask him two questions:

1.  In what state did he file? (In case it wasn’t Arizona.)
2.  When did he file? (It’s helpful to know the date.)

You can verify a bankruptcy filing

You can go to the Federal Bankruptcy Court’s online “PACER” system to verify for free* whether a bankruptcy was actually filed or not.

https://pcl.uscourts.gov/pcl/index.jsf

To verify a bankruptcy filing

Once you are fully registered on the PACER website, you’ll find that it’s easy enough to use:

• Under the list of bankruptcy courts, select Arizona (or whatever state the tenant claims to have filed in).
• Click on the “Case Locator” button.
• In the search banks, enter--
  • Type of case: “Bankruptcy”
  • Title: Your tenant’s name
• Click the search button.
• A list will appear. If your tenant’s name seems to be on it, click on the case number.
• From the choices that then come up, click on “Notice of the Bankruptcy Filing.”

That will tell you everything you really need to know: the filer’s name and address are there so you can confirm whether or not it is your tenant, as well as the date of filing. Now you know for certain whether you can go forward with your auction and whether you were being conned.

We had no idea!

As I said, formal notices of filing from a bankruptcy court can take time to be issued. So what happens if a tenant did in fact file for bankruptcy, said nothing to you about it, your auction went forward and later you receive notice that the tenant had filed days before your auction?

Although in that situation you did technically violate the court-ordered stay, you had received no notice of its existence. Therefore, your violation was not a willful disregard of a court order. Generally, the court will not penalize a creditor in that situation. I would expect the court to require that the money received from the auction be returned to the bankruptcy estate, however.

Act now

Registering to use the PACER system takes about a week since after registering on-line you’re sent a confirmation number by mail that you have to enter the first time you use the site. It therefore pays to register now, while you’re thinking about it, in case the need arises in the future to use the service.

Now what?

If it turns out that the bankruptcy is for real, as I have said here in the past, the best solution is to ask the tenant to take his contents and leave, in return for which you will simply forgive the entire debt. Trust me. It’s the cheapest solution . . . by a lot.

* The PACER website actually charges a few cents per page for its reports, but if your total charges are less than $15 in a calendar quarter – which represents a lot of pages – you won’t be billed.

[This article deals with a law related subject at a general level and I not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issue.]

Richard Marmor has been in the self-storage industry for over 30 years, as a facility owner and consultant. He was the founding president of AZSA and is its lobbyist at the Arizona Legislature, where he authored many of the self-storage industry’s laws. An attorney, Richard also created most of AZSA’s forms; he is a regular speaker at AZSA educational workshops around the state; and his articles appear regularly in the AZSA newsletter and website.