Congress recently passed significant bankruptcy reform legislation. This new law goes into effect October 17, 2005. A brief discussion of current law will help you understand the changes and how these changes will impact landlords and the property management industry as a whole.
Resident bankruptcies cause the most problems when the resident has not paid rent or is otherwise in default and eviction is contemplated or actually in process. Currently, any resident who files bankruptcy is immediately shielded from eviction by the automatic stay. The automatic stay immediately goes into effect upon filing bankruptcy. The automatic stay protects the resident from eviction like a shield or force field. Once the automatic stay goes into effect, you may not start, continue, or finalize any eviction of the resident. You can only go forward with an eviction after you lowered the force field protecting the resident. To lower the figurative force field, you must obtain a court order granting you relief from the automatic stay. Obtaining relief from the automatic stay usually takes at least 30 days, and the filing fee is $150.00 not including any attorneys’ fees. The automatic stay is still part of the new law. However, the new law makes it more difficult for residents to delay an eviction action through bankruptcy. Eviction delays should be reduced under the new law because of new standards of qualification for the initial filing of Bankruptcy, quicker procedures for lifting or defeating automatic stays, and restrictions on filing back-to-back bankruptcies.
The current law provides for little to no preliminary tests for an individual to file. The new law creates a test to determine whether a debtor is qualified to file a Chapter 7 Bankruptcy. This test is based on the individual’s income. If you do not qualify for a Chapter 7 Bankruptcy you could be forced into filing a Chapter 13 Bankruptcy. Under the current rules, a Chapter 13 often takes longer to get relief from stay. This changes under the new rules. The new requirements for relief from stay are the same for Chapter 7 and Chapter 13.
All individuals who seek to file Bankruptcy will also have to complete credit-counseling training before filing. A debtor may avoid this training, but the situations are limited. They are limited to situations where there is no counseling available in the district, there was an immediate need to file bankruptcy and the debtor could not obtain the required counseling five days prior to filing, or the debtor is incapacitated, disabled or on active military duty. Theoretically, if a resident has to get credit counseling prior to filing bankruptcy, the resident will not be able to file and get the automatic stay in place prior to the time you have evicted the resident in non-payment of rent scenarios. Only actual experience under the new law will determine if this theory plays out.
A RESIDENT HAS FILED BANKRUPTCY
Let’s assume that a resident qualifies to file Bankruptcy and files. Currently, the landlord/creditor must request a relief from stay with the Bankruptcy court before they can obtain a judgment for possession on the property. This process allows the resident at least another month in the property, sometimes more. Under the new law, this time is very likely to be shortened. The length of time the relief will take depends on the type of eviction sought, and what the resident tells the Bankruptcy Court.
EVICTION FOR NON-PAYMENT
If an eviction is filed based upon unpaid rent, the resident must file a certification at the time they file bankruptcy. That certification must state whether the resident can cure the default under state law. In Colorado, this means that the resident would have to file the certification during the three-day demand for rent. The resident would also have to deposit any amount of rent that would become due in the next thirty days with the clerk of the court. If the resident’s certification is incorrect, then the landlord can file an objection with the Bankruptcy court. The landlord is then entitled to a hearing within ten days of its filing the objection (as opposed to the 30 day process now). If the landlord prevails at the hearing, then the automatic stay is immediately lifted.
EVICTION FOR SUBSTANTIAL VIOLATION
In substantial violation cases, the landlord must provide the notice of the violation to the Bankruptcy court. This notice is referred to as a landlord’s certification. The certification must state that the resident either has an eviction action filed against them for a substantial violation, or within the 30 day period prior to the Bankruptcy filing the resident had endangered property or illegally used or allowed to be used a controlled substance on the property. After the landlord’s certification has been filed, the resident must respond to this certification within fifteen days. If the resident does not respond within fifteen days, then the landlord is entitled to relief from stay. The Bankruptcy clerk will send an order indicating relief has been granted. If the resident files a response, then a hearing is set within ten days on whether or not the substantial violation occurred or has been remedied. In Colorado, a resident does not have the right to remedy a substantial violation.
Sometimes a resident hands you a copy of the notice of automatic stay when the sheriff shows up for the physical move. The new law addresses this scenario by spelling out the rights and procedures when the landlord has already obtained a judgment for possession prior to the resident filing Bankruptcy. The resident must certify whether they have a judgment for possession against them, whether they have the ability under state law to cure the judgment, and the resident must pay a deposit to the Bankruptcy Court. The law is not clear as to the amount of the deposit. If the resident certification is inaccurate, or the deposit is not paid, then the landlord can dispute the resident certification. The landlord is then entitled to a hearing within ten days. Upon proof that the resident does not have the ability to cure the default, the relief from the automatic stay is granted.
If the resident says that there is a judgment, but fails to provide certification that the resident has the right to cure the judgment, then the automatic stay does not apply. The Bankruptcy court will promptly notify the landlord that the automatic stay does not apply. Hopefully, under the new law this will be a frequent occurrence. Specifically, the resident will fail to provide the necessary certification or deposits, and thus the clerk of the bankruptcy court will inform the landlord that the automatic stay does not apply. Obviously this is preferable to the current system because the force field (the automatic stay) potentially can be lowered without you having to do anything, and more importantly without you having to spend any money on attorneys’ fees and costs. The new law is still a big improvement over the old law in those cases where the resident certifies. You get relief from the automatic stay much quicker (10 days as opposed to 30), and under the new law the resident hopefully will actually have to pay the full amount of the disputed rent to hold your eviction efforts off.
When it comes to bankruptcies, besides non-paying residents who are parked in your units and protected by the automatic stay, the most significant other issue is serial bankruptcy filers. A resident who files bankruptcy over and over, whether legally or illegally, is a serial bankruptcy filer. The current law provides that a debtor, who has filed a Chapter 7 Bankruptcy and received a discharge, cannot refile bankruptcy again for six years. The new law bars another Chapter 7 Bankruptcy filing for eight years. The new law also provides that a debtor filing a Chapter 13 Bankruptcy cannot receive a discharge if they previously received a discharge in the last four years from a Chapter 7 Bankruptcy. There are no restrictions in the new law on the amount of times a debtor can re-file a Chapter 13 Bankruptcy.
The ban on serial Chapter 7 Bankruptcies only applies to the bankruptcies where a debtor receives a discharge. Often there are residents who file bankruptcy in order to obtain the protection of a relief from stay, but then never go forward with their bankruptcy. The new law addresses this issue. It states that if a debtor has two or more cases under any Bankruptcy Chapter that were dismissed during the prior year, the automatic stay will not go into effect until the Bankruptcy court holds a hearing. At the hearing the court makes a determination on whether the bankruptcy filing was made in good faith. An interested party can notify the Bankruptcy Court that a debtor has filed a Bankruptcy in violation of the rules. If the Bankruptcy Court determines that the filing was not made in good faith, the filing is automatically dismissed.
Under the new law we are very likely to see substantially fewer Bankruptcies filed for the sole purpose of buying time in a property. This is because there is now a higher threshold for filing a Chapter 7 Bankruptcy and a Chapter 13 Bankruptcy, and there are additional protections for the landlord obtaining relief from the automatic stay. Landlords will still have to work with the Bankruptcy court, but the time lost could be less after October 17, 2005, depending on what type of eviction action is being pursued and the manner in which the resident has responded.