Bankruptcy, What Does It Mean for Housing Providers?
By: Kristen Wills- North Carolina & Virginia Licensed Managing Attorney
with Brownlee Whitlow & Praet, PLLC
When a debtor files a bankruptcy petition, whether for Chapter 7 or Chapter 13, there is an “automatic stay” of actions by creditors to collect debts from the debtor. What is an automatic stay? An automatic stay is a legal injunction that immediately halts collection actions, lawsuits, and for housing providers, eviction proceedings. The automatic stay is like a shield for a debtor, which provides the debtor with time to address their financial situation under the supervision of the bankruptcy court and trustee.
While the automatic stay is in place, the housing provider is prohibited from filing or prosecuting an eviction action, serving debtor demand letters, or enforcing collection efforts. All these activities must cease immediately upon notification that the debtor or resident has filed a bankruptcy petition. If you receive a bankruptcy petition from a resident and are unsure of its legitimacy, halt all collection or eviction efforts and contact your local counsel for guidance. Violating the automatic stay can result in serious financial penalties or sanctions imposed by the bankruptcy court.
What if you received a judgment for possession before the resident filed a bankruptcy petition but have not had the opportunity to file the writ?
Pursuant to the US Bankruptcy Code, the filing of a bankruptcy petition does not operate as a stay of the continuation of any eviction when the housing provider obtains a judgment for possession before the date of the filing of the bankruptcy petition. However, there is an exception to this general rule. The automatic stay does apply if the debtor files a certification with the bankruptcy court and serves upon the housing provider a certification that under state law, there are circumstances where the debtor would be permitted to cure the entire monetary default which gave rise to the judgment for possession AND the debtor deposits with the clerk of court any rent that would become due during the 30-day period after the filing of the bankruptcy petition. This would serve to extend the stay temporarily for 30 days.
Some states do provide the right for residents to cure the balance of a monetary default after a judgment for possession (Right of Redemption). However, there are no laws in North Carolina that give residents the right to cure monetary defaults after the judgment in a breach of contract matter. Nevertheless, if you are in a situation where you obtained a judgment for possession prior to the filing of the bankruptcy petition, however, you have not had the opportunity to file and execute the writ of possession, it is recommended that the housing provider seeks an Order from the bankruptcy court where the court acknowledges the automatic stay is terminated or absent. The primary reason for this is that the Sheriff’s office in most counties will immediately return the Writ if they become aware that the resident has filed a bankruptcy petition. The Sheriff’s office will then ask that they be provided with something from the bankruptcy court confirming the ability to move forward with the Writ. Once you obtain such an Order, then you are free to file and execute the writ of possession.
Relief from stay will only allow the housing provider the ability to seek possession only of the premises and not the balance of the unpaid rent. The stay will remain valid on the pre-petition balance. The pre-petition balance will likely be discharged upon successful competition of Chapter 7 bankruptcy petition or possibly paid to the housing provider through the Chapter 13 bankruptcy plan. Nevertheless, throughout the tenure of the bankruptcy petition, the housing provider is prohibited from serving demand letters or enforcing collection efforts. The housing provider may seek collection of the post-petition balance upon the closure of the bankruptcy petition.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information in this article is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Viewers of this material should contact their attorney to obtain advice with respect to any particular legal matter. No viewer of this material should act or refrain from acting on the basis of information in this presentation without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader and Brownlee Whitlow & Praet, PLLC or any contributing law firms. All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed.