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.)
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!)