For debtors, deciding what to do with a residential lease is an important part of filing a bankruptcy. For landlords, receiving a notice that a tenant has filed bankruptcy can be unnerving and confusing. Below is more information regarding residential leases in bankruptcies and steps landlords and tenants should consider.
How Courts Treat Residential Leases in Virginia Bankruptcies
In a bankruptcy, a residential lease is called an “unexpired lease” and is considered a part of the bankruptcy estate. The bankruptcy estate is all of the property, both tangible and intangible, owned by the debtors. When tenants file bankruptcy, they must choose whether they want to “assume” the lease or “reject” the lease. Assuming the lease means that the tenant wants to stay in the lease and continue making payment. Rejecting the lease means that the tenant will not stay in the rental and will find other living arrangements.
In deciding whether to reject or assume a lease, a tenant-debtor must consider two important questions. First, can the tenant-debtor afford the lease? If not, the debtor might decide that it is a good time to find a better place to live. If it is a Chapter 13 bankruptcy, the Court might not allow the debtor to stay in a rental that is excessively unaffordable. Second, is it possible for the tenant-debtor to make the lease current? If the tenant is very far behind on monthly payments, he may not be able to afford to pay monthly rent, make his Chapter 13 payments (if applicable), and make up the arrears.
What Happens After a Trustee Makes a Decision
Ultimately, it is up to the trustee as to whether a lease is assumed or rejected. Trustee may utilize the debtor’s election to make its decision. A trustee has 60 days to assume or reject a residential lease in a Chapter 7 Bankruptcy. If the trustee fails to make a decision, the lease is considered rejected and the landlord may act accordingly. In a Chapter 13 bankruptcy, a trustee has until the plan confirmation to decide. Thus, it can take quite some time in a Chapter 13 bankruptcy for the lease to be assumed or rejected, especially if the confirmation of the plan is delayed for any number of reasons.
Landlords wishing to expedite the process can try to arrange for a stipulated rejection or assumption of the lease prior to the plan confirmation, involving the debtor, the trustee, or both. The landlord generally must file a motion with the Court to approve the decision, even if all parties are in agreement. If the parties are not in agreement, the Court will hear argument on the Motion and will make a ruling. Where the deadline for filing a proof of claim precedes the plan confirmation, this avenue is very helpful to landlords wishing to get a jump on finding a new tenant and establishing damages.
In practice, trustees are unlikely to reject a lease, forcing a tenant to vacate. However, it is very important for both tenants and landlords or residential leases in Virginia bankruptcies to understand the timing and process for assumption and rejection of residential leases to ensure timely filing of all necessary documents.
Rent and Damages
If tenant assumes a residential lease, the tenant is required to make up any past missed payments, including late fees, to the landlord. If a tenant rejects a lease, the lease is considered breached as of the date the tenant filed bankruptcy. For rejected residential leases in Virginia bankruptcies, the landlord is entitled to pre-petition rents, late fees, and damages as an unsecured creditor, and must file a “proof of claim” to evidence the amount owed. The claim will also include future rents up to the maximum of one year of unpaid rents under the contract or 15% of the total amount of unpaid rents remaining on a contract (subject to certain restrictions).
The landlord may also be entitled to file an “administrative claim” for payment of post-petition rents. Seeking administrative costs can be very advantageous to landlords, as those claims receive priority and are paid prior to unsecured claims. Thus, in Chapter 13 bankruptcies where distribution to unsecured creditors is likely to be pennies on the dollar, an administrative claim can be very important. A security deposit is likely considered a secured interest which the landlord can retain as an offset to damages. However, landlords should be careful not to withdraw or otherwise dispose of the security deposit without first ensuring that it will not violate the automatic bankruptcy stay.
Once the Court has ruled (or the trustee has elected) to reject a lease, the lease is breached and the tenants must vacate the property. If they do not, the landlord can seek to lift the automatic stay and file an Unlawful Detainer action in General District Court. However, in a Chapter 13 bankruptcy, the landlord will seek money damages in the bankruptcy proceeding through a proof of claim, rather than in the state court.
Residential leases in Virginia bankruptcies have a lot of moving parts. If you are a tenant, we can help you make the best decision regarding your rental. If you are a landlord, we are prepared to represent you diligently in any bankruptcy action. Call today for a free bankruptcy consultation. 757-645-0827.
Gregory S. Bean is a bankruptcy attorney at Collins & Hyman, representing consumer debtors in Chapter 7 bankruptcies and creditors in Chapter 7 and Chapter 13 bankruptcies.
The material in this post is for informational purposes only and should not be utilized as legal advice. In order to properly analyze the contents as related to your specific circumstances, a consultation would be necessary.