Can I collect rent on a business that declares bankruptcy?

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With Covid-19 throwing a wrench in the plans of many businesses, the possibility of having a tenant claim bankruptcy is very possible given the tumultuous financial market. So with business bankruptcies being more relevant now than it has ever been, it can be especially frustrating for creditors who don’t understand how bankruptcy laws effect them and how to maneuver such circumstances to protect one’s interests with a landlord attorney.  However -through the following of bankruptcy proceedings and keeping one’s interests in court – a landlord can receive payment owed for recovery due to possible damages from the circumstance.

Be Aware of General Bankruptcy Concepts

When it comes to bankruptcy, it’s a complicated area that has several avenues to explore. However, there’s four concepts that one needs to know of as they will assist one in their given situation and how to navigate such situation.

Bankruptcy Chapters

There’s several different chapters when it comes to bankruptcy law, with each chapter applying to a class of filer and specific situation. So when a business must file for bankruptcy, they oftentimes file it under Chapter 11 or Chapter 7. On certain occasions, a smaller business carrying smaller debts files for Chapter 13 of bankruptcy laws that commonly function like a Chapter 11 bankruptcy. So what are these Chapters of bankruptcy? Here’s a quick look at what they mean and how they’re handled:
  – Chapter 7 Bankruptcy – Chapter 7 bankruptcy is the liquidation of assets by the business trustee as a means to cover the filer’s debts. Since this is commonly reserved in events of serious bankruptcies, more often than not creditors recieve only a portion of what they’re owed. However,  there are a few exceptions under this chapter.
  – Chapter 11 Bankruptcy – Chapter 11 bankruptcy is a situation in which the filer retains control of their business’s assets and attempts to restructure business so that they can continue operations to benefit all parties involved. The intention of such bankruptcy is set up so that the creditors are best served since they’re taking a haircut (that has be agreed on beforehand) on loans and allow the bankrupt business to continue.

Timing of Petition

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The debts that are incurred before a bankruptcy filing are known as “pre-petition” claims, as debts collected after bankruptcy filing are called “post-petition” claims. Knowing the timing of the petition is incredibly important information for landlords, since a post-petition claim will almost always take priority over a pre-petition claim. So when it comes to rent, a rental payment that is owed by tenant who is bankrupt (who continues to occupy) will get paid off. In a situation of pre-petition rent, there’s a solid chance that such rent will not be paid.

What’s An Automatic Stay?

An automatic stay is a law that ceases any to collect debt once the tenant files for bankruptcy. Such a law ensures that a tenant’s assets (that are remaining) can be liquidated or utilized for distribution evenly among the creditors involved. If there is no permission from the courts, it is against the law to attempt to collect unpaid debts (but co-signers are more inclined to collect themselves.)

What Are Preference Rules?

Preference rules can get a little muddy, but we’re here to walk you through them. These rules are designed in order to prevent an individual or a business from favoring one creditor over another by paying their debts before a bankruptcy filing takes place. For example: If a tenant pays a debt that is overdue, then files bankruptcy within 90 days, this payment can be considered as a preference (which allows the courts to take it away from you.) Since one doesn’t necessarily know if a business is going to file for bankruptcy or if it will be declared, it can make collecting payments from a tenant fairly risky.

Leases & Bankruptcy Proceedings

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Another important aspect to consider as a landlord is how a lease behaves when a tenant files for bankruptcy. If bankruptcy protections or proceedings are misunderstood, it can lead to landlords exposing themselves in an unfavorable light.

So for starters, you’ll need to know that if the lease has been terminated before they declare bankruptcy. The tenant has no right in regards to continuing the lease and they can be evicted fairly easy if the rent isn’t getting paid. 

If the lease remains in effect, the process does get a little more complex. Although several commercial leases consider the event of bankruptcy, they are nearly unenforceable. However, it is illegal for one to terminate their lease or have such laws bend around a bankruptcy.

Sources

https://lusk-law.com/landlord-tenant-law/

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