A tenant can file for bankruptcy as a tactic to protect against eviction. Generally, there are two types of bankruptcy filings that arise during a manager/owner-tenant relationship which are Chapter 13 and Chapter 7. The most basic difference between the two bankruptcy filings is that Chapter 13 is a reorganization while Chapter 7 is a liquidation. However, the most important aspect for the manager/owner when a tenant files for either bankruptcy is that the court puts a hold on almost every action against the debtor or the debtor’s property, known as the “automatic stay”.
The automatic stay stops any attempt to evict the resident and/or attempts to collect past due payments of rent. The automatic stay is applying to any creditors with actual notice of the resident’s bankruptcy filing and will apply to you as soon as you receive notice, possibly in response to an eviction complaint. In chapter 13 cases, the tenant’s bankruptcy attorney files a plan which provides the debtor an opportunity to assume or reject a debt. However, in Chapter 7 cases, there is no plan filed as the debtor has little to no assets in comparison to its debts. If the manager/owner is aware of the bankruptcy filing and proceeds to send a notice or file an eviction against the resident, they may be subject to civil sanctions for violating the automatic stay.
Ultimately, once a tenant files for bankruptcy, the automatic stay protects the tenant from the manager or owner from collecting past due rent. If the manager or owner attempts to collect during the automatic stay period, they can face severe penalty and fines.
That being said, all is not lost. A landlord can file a motion to vacate the stay and bring an action for eviction if the resident does not pay rent after the eviction or fails to provide for a plan that will promptly (think a year or so) pay all back rent and fees due. We will address this in a future blog.