Bankruptcy of a Tenant
By Christopher A. LaVoy, Esq.
Tiffany & Bosco, P.C.
A renter declaring bankruptcy can present a frustrating and expensive problem for a mini-storage operator. If rent is unpaid, the operator faces a thicket of bankruptcy restrictions for collecting on it. One core restriction that operators need to be familiar with is the “automatic-stay.”
By the time someone declares bankruptcy, they are typically being hounded by creditors from all sides. The whole idea of a bankruptcy is to restore order to the extent possible. For that reason, the law provides that the instant the bankruptcy is filed, all collection activities by creditors must stop, and the renter’s financial situation is frozen as of that moment. This situation is known as the “automatic stay.” It prohibits “any act to collect, assess, or recover a claim against the debtor” that arose prior to bankruptcy.
You cannot send collection letters to the renter, cannot cash checks from him, cannot report him to credit agencies, cannot file or continue prosecuting a lawsuit against him, and cannot auction the contents of his unit pursuant to your statutory lien rights. As the commentator has put it: “Any collection effort you can think of undertaking against a debtor that would make you smile—don’t.”
When someone files for bankruptcy, a list of creditors must be given to the court. The court then sends a notice of the bankruptcy filing to each of them. When you receive such a notice, be sure to make careful note of the date upon which the bankruptcy was filed. What happened before that date and what happens after it are treated differently. Thus the situation is different for unpaid rent arising after the date of filing. That’s referred to a “post-petition” debt.
By law, a second event happened automatically at the instant of filing: all renter’s property ceased belonging to the renter and became the property of a new legal entity under the control of the court known as the “bankrupt estate.” The property in the bankrupt estate is important to the court, and some of it may be subject to special attention or rules.
Thus, you are allowed to send a collection letter, make a credit report, and sue on a post-petition rent obligation. However, in most instances you are still prohibited from auctioning the contents of the renter’s unit because much of it is probably estate property.
It is important that you not violate the automatic-stay. If you do, the bankruptcy court will likely require you to return any money you collected from the violation and may impose one or more other sanctions, such as a fine, holding you in contempt, or even barring your claim against the debtor altogether.
How then do you get rid of a renter who is in bankruptcy and not paying rent, but still occupying the unit? You should first talk with the renter’s attorney to see if you can work out a deal where the renter voluntarily vacates the unit. If you cannot work something out, then you need to apply to the bankruptcy court to have the automatic-stay lifted so that you can evict the renter. Depending on the circumstances, the bankruptcy court may also give you permission to exercise your statutory lien rights to satisfy the debt. You will generally need to hire a lawyer to apply to lift the automatic-stay. Regrettably, there are few short-cuts in bankruptcy law.
You have one advantage in the process. All of the renter’s creditors are divided into two different classes: “secured creditors,” whose debts are somehow secured with property, and “unsecured creditors,” basically everybody else. Secured creditors’ claims have a high priority in the bankruptcy process. Arizona law gives self-storage operators a lien on the contents of the renter’s storage unit [see A.R.S. § 33-1703(A).] Thus you will be a secured creditor in most instances for a pre-petition rent obligation.
Last, you must remember to file what is called a “proof of claim” in the renter’s bankruptcy so that you are eligible to receive money or property from the bankruptcy estate to satisfy the renter’s debt to you. There is normally a deadline for doing this—do not miss it.
[This article deals with a law related subject at a general level and is not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issues.]
Christopher A. LaVoy is partner in the law firm, Tiffany & Bosco, P.C., and serves as AZSA’s legal counsel.
Source: Behind Closed Doors, AZSA Newsletter Archives