Lots of people I see filing bankruptcy are landlords.
They’re not people who wanted to be landlords. I’m talking about people who are renting out a house they cannot sell. (Because the value has dropped way below what they owe.)
Lots of people who talk to me about bankruptcy are landlords
They often come to see me when they realize they can’t afford to take the monthly loss on the rent, either. And so we talk about filing bankruptcy to get rid of the house.
When they decide to file bankruptcy to get rid of that house, they ask about their tenants. People don’t want to leave their tenants high and dry.
If you are in that situation, here’s good news. A law signed by President Obama protects your tenants after foreclosure. The foreclosure buyer cannot just evict your tenants. The tenants have at least 90 days to find a new place to live and move out.
Here’s how that would work.
Suppose you come talk to me in January and we decide that you need to file bankruptcy. You stop paying the mortgage on that rental property in February and file bankruptcy at the end of March.
Your mortgage company would probably get relief from the automatic stay in early May. ”Relief from the automatic stay” means permission from the bankruptcy judge to foreclose. In Virginia, the foreclosure sale might be scheduled around the Fourth of July.
Then, under the “Protecting Tenants At Foreclosure Act,” the bank or foreclosure buyer has to give the tenant 90 days notice to leave. That’s October.
So, we are talking nine months from your decision to file bankruptcy before your tenants have to leave–plenty of time for them to find another place.
(This protection does not apply if the “tenants” are members of your immediate family.)
Just letting the place go to foreclosure without filing bankruptcy is not a good idea. The mortgage company can still come after you. (Often the first mortgage will not, but the second, if there is one, certainly will.) And, if you broke the lease, so can the tenants.
(All this has application if you’ve already moved out of your house and it’s vacant. Especially if there’s a high condo fee, the bank may be very slow to foreclose. And as long as you are owner, you are liable for the condo fee. Even after the bankruptcy is filed. Rather than take that loss, make a little money. Rent the place!)
{ 9 comments… read them below or add one }
I am a tenant in a house going thru forclosure. I’m I to continue paying rent? Some tell me to stop paying and put it in an escrow account others tell me to keep paying.
Could you clear this up for me?
Thanks John
Under Federal law, your lease survives the foreclosure–meaning they have to let you stay until the end of the lease–if the house is bought by by bank or an investor. If it’s bought by someone who plans to live there, they have to give you three months to move out. As to what you should do, it may depend on state law and I don’t know what state you are in. (Not sure I’d know the answer anyway.)
Supposed you want to rent to someone who might be considered family. Ducchi T. Quan, a lawyer in Tyson’s corner, suggests posting an ad on Craig’s List. Invite people to come by and submit bids over one weekend. That provides evidence that you got the best price you could. And the lease should stand up against the bank or investor.
http://www.quanlegal.com/
My wife and I just got discharged from a chapter 7 bankruptcy in Virginia – we have a rental property with a primary mortgage and home equity loan that has been modified to interest only. The house is about $50,000 under water – the holder of the modified home equity loan said they will keep the modification in place for 3 years – but I just don’t see the house gaining the $50,000 in negative equity in 3 years – when the interest only loan will be boosted up to the full payment again. If we let the house go into foreclosure will we have a tax liability if we filed bankruptcy? Also, what if we sell in short sale – will we have a tax liability on the forgiven debt since we are in foreclosure?
Thanks.
There’s no tax liability on the forgiven debt–the bankruptcy stops that. In some cases–depending on when you bought the house, what you paid then, your depreciation, and whether the shortsale price is higher–you might have a capital gain on the shortsale. You need to talk to a tax advisor on that.
Your question skipped a step. (Maybe because you already know the answer.) Are you getting enough rent to cover the first mortgage? If you are, can you just collect the rent, pay the first and ignore the second? With that strategy foreclosure might be years and years away and you can make a lot in the meantime. Maybe that’s what you are planning to do.
I am renting a home and the landlord has filed chapter seven bankruptcy .My question is are we obligated to pay the land lord rent when we will probably never see our deposit and we don’t know how long we have left in the home.
That’s a tricky one and may depend on the laws in your state. I’m not going to attempt to answer. However, I’d ask you how long you think you should live for free because someone else has filed bankruptcy?
I am a landlord who just filed chapter 13 bankruptcy and I have surrendered the property in the bankruptcy. My tenants have broken terms of the lease the entire term of stay and I want to evict them. I have filed 13 so recently that I have not even been to court yet. Do I still have the authority to evict the renters?
Jon:
You should have asked both your landlord-tenant lawyer and your bankruptcy lawyer before you went down that road. Some combination of you and the Chapter 13 trustee has authority to evict the tenant. You need to talk to your Chapter 13 lawyer and that lawyer probably needs to talk to the Chapter 13 trustee.