If your resident files a petition for relief under the U. S. Bankruptcy Code, then an "automatic stay" goes into immediate effect which may prevent you, as landlord, from continuing any efforts to collect unpaid rent or evicting your resident. You may often times hear the automatic stay referred to as a "362 Stay" as its powers come from Section 11 USC 362 of the Federal Bankruptcy Code. The automatic stay prohibits creditors (including landlords) from attempting to collect certain debts that arose prior to the date of filing of the bankruptcy petition which, are therefore, included in the bankruptcy. Such "pre-petition debts include obligations to pay rent which arose prior to the filing of the petition. The automatic stay also prohibits a landlord from taking possession of leased premises away from the tenant. Basically, it means any attempt to collect a debt (rent or seek possession of the premises) involved in a bankruptcy can be a violation of the automatic stay.
What may be needed is obtaining "relief from the automatic stay" from the Bankruptcy Judge. That process usually takes approximately forty-five days. The good news is that the bankruptcy judges will not allow a resident to remain in the premises unless rent is paid. The bad news is that a bankruptcy filing will often delay the recovery of possession of the premises where rent has not been paid and the relief from the automatic stay will entail some additional expense.
If a landlord attempts to collect unpaid rent or evict a resident without first obtaining relief from the automatic stay, the court could hold the landlord in contempt and impose sanctions against them. Sanctions may include award of attorney’s fees, court costs and/or fines. The court has the power to reverse an action taken in violation of the automatic stay. For example, rule that the eviction was improper and invalid. The court could order the return of the premises to the resident. The landlord could face liability for damages to resident.
If a landlord has filed an eviction (a forcible entry and detainer or "FED"), with the court and the court has not yet entered an order for possession in favor of the landlord then the landlord must obtain relief from the automatic stay.
However, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 "BAPCPA", if a residential landlord already has a judgment for possession of the premises before the day and time that the resident files her petition for bankruptcy; the automatic stay does not prevent the landlord from continuing to evict the tenant.
Colorado law allows a landlord to evict a tenant if the tenant has engaged in felony criminal behavior, usually involving violence or drug activity (Substantial Violation). The BAPCPA added a specific provision to the Bankruptcy Code which allows a landlord to evict a tenant who is engaging in such activity. To avoid the effect of the automatic stay, the landlord must file with the bankruptcy court (with a copy to the tenant) a written certification that the resident has engaged in activity which endangers the property or illegally used a controlled substance within the preceding thirty (30) days. The landlord may then immediately provide to the tenant the Notice to Quit for Substantial Violation and proceed with an eviction based upon the substantial violation.
The strategy a landlord employs when a resident files bankruptcy may vary slightly depending upon which Chapter of the Bankruptcy Code the case is filed under and the facts of each case. A Chapter 7 "liquidation" case takes approximately four to six months. A Chapter 13 (Repayment Plan" case can take up to five years. When the bankruptcy court grants bankruptcy relief to the resident, the lease agreement may become unenforceable in certain respects. Although the landlord and resident may continue to honor it if they wish, without seeking relief from the automatic stay. However, if rent is not being paid or if the landlord wishes to evict, the motion to the bankruptcy court is required until such time as the bankruptcy process is concluded. Thereafter, the automatic stay expires. We recommend that the landlord consider his options and decide how to proceed without delay.
The old adage that "time is money" has never been more applicable then under these circumstances. It is a strong likelihood that the landlord will not be able to recover any rent that is owed by the resident. Some delay in regaining possession of the property is a strong likelihood as well. The landlord needs to contact an experienced attorney who will respond quickly to insure that his rights are vigorously defended and protected.
Klass Law Group is your resource in the case of a problem resident who files bankruptcy, as well as providing you answers to legal questions in the day-to-day operation of your rental business. With our years of practicing law and with the more than 100 years of collective experience representing Colorado landlords, the Klass Law Group can provide you with immediate information and guidance via email or telephone.
If we can provide you the information you need without extensive legal research, we will not charge you. It doesn’t matter if you are an existing client or not, we welcome the opportunity to answer your questions and protect your rights as a landlord.