Bankruptcy & Rental Properties
As the owner of rental properties contemplating bankruptcy, you need the impact of a bankruptcy on your rights and obligations associated with your leased real estate. Whether you file a Chapter 7 bankruptcy (liquidation of debts) or a Chapter 13 bankruptcy (pay off debts over time through a court approved plan), these types of legal proceedings impact your position as the owner of rental property.
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Function
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The ultimate function of a Chapter 7 and a Chapter 13 bankruptcy is to provide you a certain level of protection from your creditors. In addition, both types of bankruptcy are designed to allow you to resolve your debt problem in a manner that permits you to move on with your life absent ongoing legal challenges from your creditors.
Significance
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The most significant impact of your bankruptcy on your rental property involves your duty to your tenants. Whether you pursue a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, you legally are obliged to honor any existing lease agreements. Although you can attempt to negotiate an early termination of a lease agreement, you cannot force a tenant from the premises or impose an alteration of lease terms, including an earlier termination date, on any tenant.
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Types
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The requirement that you honor preexisting leases when you file for bankruptcy applies to any type of rental agreements, including residential, commercial and land leases. Consequently, if you are involved in a long-term commercial or land lease, the bankruptcy court will need to intervene and issue appropriate orders that protect the interests of these tenants, allow you to complete your bankruptcy case and ensures that the rights of your creditors are satisfied as allowed by the U.S. Bankruptcy Code.
Misconceptions
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The most common misconception associated with a bankruptcy case and rental properties is that lease agreement automatically terminates when a debtor files for bankruptcy. In fact, the exact opposite is true. The U.S. Bankruptcy Code requires lease agreements to be honored fully unless the debtor and a tenant enter into a new court-approved agreement or unless the bankruptcy court itself issues an order altering those terms and provisions as permitted by law.
Expert Assistance
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Bankruptcy laws and procedure are complex legal matters. Therefore, before filing for bankruptcy--particularly if you own rental properties--consider engaging the services of an attorney to represent your interests and protect your rights. Local and state bar associations maintain directories of attorneys in different practice areas, including bankruptcy law. Contact information for these organizations is available through the American Bar Association:
American Bar Association
321 N. Clark St.
Chicago, IL 60654-7598
312-988-5000
abanet.org
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References
Resources
- Photo Credit House image by Einar Bog from Fotolia.com
