What to do When Residents File for Bankruptcy:
A Guide for South Carolina Residential Housing Providers

By: Morgan Dunn-North Carolina and South Carolina Licensed Attorney with Brownlee Whitlow & Praet

      As a housing provider in South Carolina, it is inevitable that you will encounter residents who file for bankruptcy.
Most residents file for bankruptcy under Chapter 13 of the United States Bankruptcy Code (“Chapter 13”). Chapter 13 is
based on reorganization, allowing debtors to pay off some of their debts while discharging other debts and keep their assets. 
Although less common, some residents may file under Chapter 7 of the United States Bankruptcy Code (“Chapter 7”) where
the focus is selling off non-exempt assets to pay creditors. Chapter 7 has a very strict eligibility requirement, which qualifies debtors based on their income and debt ratio. Because Chapter 13 bankruptcy is most common, this article will focus on the Chapter 13 bankruptcy process.

      It is important to note that in bankruptcy, your resident will be referred to as the “debtor.” This simply means they are
who filed bankruptcy. This term will be used interchangeably with “resident,” depending on who you are talking to. Either
way, both debtor and resident are the same person. Your role as the housing provider is one of the debtor’s “creditors.”
A single debtor will likely have multiple creditors, and some creditors will have “priority” which just means they are in line first to receive money.

      The bankruptcy court is a federal court that is separate from both the regular federal court and state court system. There are three bankruptcy courthouses in South Carolina. These courts are in Charleston, Columbia (largest court and where court clerks sit), and Greenville. There are three federal bankruptcy judges in South Carolina—one for each of the courthouses. The debtor’s location (i.e. your property) will determine the courthouse and the judge.

Bankruptcy can significantly impact your ability to collect rent. Here is what you need to know about navigating bankruptcy:

1. Understanding the Automatic Stay

      When your resident files for Chapter 13 bankruptcy, an automatic stay immediately goes into effect. This is a court order that temporarily halts all collection attempts, including rent demands (sending late notices) and evictions. As a housing provider, you are prohibited from taking any legal action to collect unpaid rent or evict the resident without the bankruptcy court’s approval. Failure to comply with the automatic stay can result in sanctions from the bankruptcy court which can
include awarding damages to the debtor as well as their costs and attorney’s fees for having to file a motion to request sanctions.

2. Filling a Proof of Claim

      To ensure you receive any back rent owed also referred to as pre-petition arrearage, you must file a proof of claim with
the bankruptcy court. This is your formal request for payment towards the outstanding balance owed by the resident on the date they filed bankruptcy (“petition date”). The bankruptcy court sets a deadline for filing the proof of claim, so be sure to contact your counsel or file your claim in advance of that deadline. If you do not file on time, you could lose your right to recover the outstanding balance as Federal Court deadlines are strictly enforced.

3. Review the Debtor’s Plan

      In a Chapter 13 bankruptcy, the debtor submits a repayment plan to the bankruptcy court for approval (“the plan”).
The plan outlines how the debtor will repay creditors, including you. You should review the debtor’s plan with your counsel
carefully to see / confirm that back rent is addressed, and ensure your claim is properly and accurately included. You can
object to the plan if you feel the repayment terms are unfair or do not accurately reflect the information in your records.

      In a bankruptcy situation, the debtor may choose to assume the lease contract, to continue with the lease terms and
remain in the property. Alternatively, a debtor may opt to “reject” the lease, instead choosing to terminate the lease and
return possession. If the debtor assumes the lease, they should cure any outstanding defaults (unpaid rent) before doing so. This is subject to the court’s discretion and often negotiated between the debtor’s attorney and your attorney. If the debtor rejects the lease, you may be able to file a claim for damages arising from the termination of the lease.

4. Consider a Motion for Relief from Stay

      In certain circumstances, the plan may not adequately provide for the resident’s outstanding balance and/or consistent monthly payment of rent. If that is the case, you should consider filing a motion for relief from the automatic stay. The bankruptcy court will conduct a hearing to receive arguments from both parties and will determine whether relief from the automatic stay is granted. If granted, you will be able to pursue eviction in magistrate court to seek possession.

      While a resident’s bankruptcy can complicate things, understanding the process will help protect your interests and ensure you have the opportunity to recover any owed rent. Contact us if you have a question about the bankruptcy process. Using
this framework, we can explain the specifics of your resident’s case and advise you on everything discussed above.

     
*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.