Tenants file for bankruptcy (not my tenants, thank goodness)

So, remember my friend, the would-be, could-be landlord? Well, he couldn’t sell his house for what he wanted for it, so he decided to give landlording a shot, for a couple of years until the market turned around. He found a family that was interested in renting his house, did a credit report (which didn’t turn out all that well, but he figured that a family looking to rent in his part of town wasn’t likely to have perfect credit anyway). He signed them on for a year lease, and they moved in.

As far as tenants go, they haven’t been bad. They keep the house up fine. They do often pay late, although they do always pay. One thing, though, that was quite unnerving: about three months into their tenancy, they filed for bankruptcy. My friend got a letter in the mail, explaining that they had filed for chapter 7 bankruptcy, to be exact. It sounds like he still gets to collect rent/utilities, but, he cant’ evict them if they don’t pay either (at least until proceedings are done). Apparently, moving forward, he can evict them for new debt, but if they had already been behind (before the bankruptcy), he couldn’t evict them for that.

From a quick online search, this is what I can find on the bankruptcy subject: “Please note that although the stay may prevent your eviction, any new obligations you incur will be payable to your creditors. That is, if you continue to rent an apartment, although a rent arrearage may be subject to discharge, if you do not pay rent accrued after the date you filed for bankruptcy the court may permit your eviction.”

Also, on a positive note, the guy isn’t managing his own money anymore – a trustee is. Apparently that’s what happens when you file chapter 7 bankruptcy. And, the trustee should be paying the landord first, housing being one of the most important things to take care of if money is scarce. So, I would think that they could file bankruptcy and still stay in the house as long as they keep paying rent. They have to live somewhere… and they won’t look good to other prospective landlords with a recent bankruptcy on their credit history.

Here’s the advice that he got on the subject, from another friend who knows something about this stuff:

I would think that, in any sane trustee’s eyes, paying rent would come first – so you may not have too much to worry about. (Let’s hope for that, anyway.)

I would approach it like this – tell him that you understand that people can get into financial trouble, blah blah blah, and that you’d like to help him out by letting him stay at the place as long as he needs to, provided that he pays you on time each month. After all, tell him, if he doesn’t pay you, then you won’t be able to pay the mortgage, and you’ll both be out of a house. In the end, he’ll have very little choice – he won’t be able to get a mortgage for quite a while, nor will he be able to rent another house or apartment. You’re literally his only decent option, and it’s definitely in his best interest to keep you happy by paying you first.

Perhaps this will end up being a positive thing – One, since he can’t leave, you may have a renter for the next seven years. Two, if that does happen, and when market circumstances improve, we may be able to dream up some sort of rent-to-own deal where you become the bank & have a guaranteed steady stream of income, from him, completely secured by the house.

This all happened a few months ago, and my friend hasn’t had to get into any sort of eviction situation yet. They do continue to pay late, but they haven’t fallen a full month behind yet. For a while, they were paying with money orders, but have since switched to personal checks, which I take to be a good sign. I sure hope it all works out for him.

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