Bankrupt Tenants: A Nightmare for Operators

February 6, 2013 0
Bankrupt Tenants: A Nightmare for Operators

If you operate a large self-storage facility, it is only a matter of time until you have to deal with a bankrupt tenant.

Even if you merely hear a rumor that one of your tenants is in bankruptcy, it’s your responsibility to verify this with the tenant and the local bankruptcy court. You can search online via PACER (Public Access to Court Electronic Records) docketing system. It’s free to register and then 10 cents per page for file access.

“If the tenant refuses to provide you with bankruptcy verification, and the court has no record of the tenant being in bankruptcy, then in my opinion you could proceed with foreclosure,” said Connie Heyer, legal counsel for the Texas Self Storage Association.

However, you should always tread lightly, because this is serious business–if your tenant has, in fact, filed for bankruptcy and you continue to foreclose, you could face massive fines and be held in contempt of court for violating a judge’s Automatic Stay Order.

Automatic Stay Order
After a tenant files for bankruptcy, a judge issues an Automatic Stay Order that halts any and all collections activity. This means you can’t continue with the lien process, nor can you send the tenant any more bills or late notices. If you’ve already started the lien process, stop immediately and have your lawyer contact the state court, especially if you’ve already filed actions to collect.

Motion for Relief from Stay
After a bankruptcy filing, the court provides your tenant with action items, deadlines and compliance requirements. If the tenant does not remain current in his post-bankruptcy obligations, you can ask the court for a Relief from Stay. Unfortunately this requires a $176 filing fee, plus it will run you approximately $750-$1,500 in attorney fees.

Also, if you are fortunate enough to be granted a Relief from Stay, it will still take 30-60 days to complete a lien sale or eviction.

TYPES OF BANKRUPTCY:

Chapter 7
During a Chapter 7 bankruptcy, your tenant liquidates all of their assets, and a trustee attempts to pay back all, or some, of the tenant’s debts. This means that, unless the tenant has a lot of assets that the trustee can liquidate and distribute funds to creditors, you are probably not going to see any money.

The Chapter 7 process takes about four to six months. A week or two after the tenant files Chapter 7, you should receive a note regarding a creditors’ meeting. Here you will meet with the tenant, the bankruptcy trustee and the other creditors.

You must get court approval before you evict the tenant, remove his property or go to auction.

Individuals can only file for Chapter 7 once every eight years, so if you have a prospective tenant who filed seven years ago, you may not want to let this individual rent space with you, as they may intend to file again.

Chapter 11
In a Chapter 11 filing, a business attempts to reorganize by retaining control of its assets. If you have businesses storing things at your facility, you could be caught up in a Chapter 11 bankruptcy.

If the bankrupt business successfully reorganizes their debt, you can expect to be paid some of the debt that the business owes you. Unfortunately, less than 10% of all Chapter 11 filings are successful, and most end up being converted into a Chapter 7 or 13.

Chapter 13
During Chapter 11 and 13 filings, you can try to collect any debts your tenant incurs after the petition date (the debtor’s filing date), but the tenant could terminate the lease, leaving you with nothing.

In both Chapter 11 and Chapter 13 filings, you need to file a Proof of Claim form, in which you list the amount of pre-petition debt you are owed.

Through a Chapter 13 filing, the tenant plans on paying back a percentage of the debt he or she owes you–occasionally all of it–through a payment plan. This plan will be agreed upon by you, his or her other creditors, and the bankruptcy court. Unfortunately, even if you file your Proof of Claim properly and on time, it can take between three to five years before you see any money.

Also, there is no limitation on the amount of times a debtor can file for Chapter 13. Unless your tenant has been habitually filing for Chapter 13 protection, the bankruptcy court will not intervene.

Perform credit checks.
A quick credit inquiry can save you a lot of money and headaches down the road. If a prospective customer has 13 maxed-out credit cards, actively collecting mortgage lenders, or a criminal history, you probably do not want this person as a tenant.

Dealing with a bankrupt tenant is extremely expensive. Even if the tenant only rents for one month before filing for bankruptcy, your hands are automatically tied for another 60-90 days, and only afterwards can you commence the lien sale or eviction process.

Make sure you don’t fall behind in collecting rent.
In 47 out of 50 states, storage operators have the right to start the lien sale process after a tenant has been delinquent for a month. Always start the lien process as soon as possible.

If a tenant is past due, promptly execute a self-storage lien as soon as possible.
Although you cannot do anything during the stay, the sooner you begin the lien sale, the more likely you will be able to collect overdue rent by filing a motion in bankruptcy court. Remember, you can never foreclose on a bankrupt tenant without a court order in hand.

In the case of a bankruptcy, acquire all the requisite information from the bankruptcy court or via PACER.

  • Tenant’s name
  • Case number
  • Chapter number
  • Filing date
  • Court where case was filed
  • How far along in the process your tenant is

Also, there are 94 judicial districts in the US; knowing exactly which federal judicial district you’re in will speed the process along.