What happens to back rent in bankruptcy?

What happens to back rent in bankruptcy?

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As the world is slowly navigating its way through the Coronavirus impact, one of the must challenging areas is found in the landlord-tenant space, and people want to know: what happens to back rent in bankruptcy?

With millions of people out of work due to the pandemic, lots of people have fallen behind on paying their rent. At the same time, many landlord rely on rental income to make a living.

As of right now in New York, while there have been some protections enacted to prevent evictions (especially based on nonpayment of rent) the enforceability of a lease remains. The pandemic and its fallout is not a defense to enforcement of the lease. So, as it currently stands, a tenant owes all of the rent that has come due under a lease.

So if you’re a tenant that lost your job, and you haven’t been able to pay your rent for the last several months, what can you expect?

For purposes of this article, I am setting aside all of the executive orders and changes to the law that have been enacted. At some point, the landlord will seek to evict you. The question becomes whether the tenant can do anything to stop that.

JUDGMENT OF EVICTION

If you haven’t paid rent for several months, bankruptcy may be an option. First, let’s start with the facts if there had already been a judgment of eviction entered against you. If there was a judgment of eviction already entered against you, and that judgment was based on the nonpayment of rent, to get the benefit in a bankruptcy case to stay the eviction, you would have to pay the total amount due within 30 days of filing of your bankruptcy case at the time of filing.

Essentially, this means that if there was an eviction scheduled stemming from a nonpayment case, filing a bankruptcy would stay the eviction if, at the time you filed your bankruptcy case, you also paid to the court the rent that comes due in the next 30 days (probably one month of rent).

If you want the stay of the eviction more than 30 days, you have to certify that you have paid the total amount due to the landlord for the arrears. So, for the most part, if you want to stay in your apartment and stop an eviction based on nonpayment of rent, you have to pay all of the arrears to the landlord within 30 days of filing your bankruptcy case.

WHAT IF THERE IS NO JUDGMENT?

What if you’re a tenant that hasn’t paid rent for a few months, but a judgment hasn’t been entered in the the eviction case yet?

If you haven’t paid rent for a few months, and you file for bankruptcy, the unpaid, pre-petition rent is dischargeable!

While this is pretty powerful, it doesn’t mean that a tenant is no longer responsible for rent. While pre-petition rent that is outstanding is dischargeable, post-petition rent is not dischargeable.

For example, let’s say there is a 1 year lease. Tenant paid the first 3 months, and then let go from work and hasn’t paid the subsequent 3 months of rent. If the tenant files their bankruptcy before or even during an eviction case, but before a judgment is entered, that unpaid rent that is due before the bankruptcy filing date is discharged. So three months of rent.

The rent that becomes due AFTER the filing of the bankruptcy case (let’s say month 7) is still due because post-petition rent is not dischargeable.

Still complicating things is that if there is a lease, a debtor in bankruptcy has to declare their intention when it comes to a lease – either reject and terminate the lease, or assume and reinstate it.

If you want to assume a lease, you must come current and cure any defaults. If you reject a lease, the lease is terminated effectively immediately, or deemed rejected no later than 60 days after you file your bankruptcy case.

Still further, the bankruptcy court cannot stay a landlord from enforcing a judgment of possession. So, if the case was a holdover case, filing for bankruptcy won’t help much at all.

Conclusion

As the world continues to figure out how to overcome the disruptions caused by the pandemic, huge issues loom between landlord and tenants. With millions of people displaced from work, many tenants have been unable to pay their rent. Still further, landlords are not receiving the rental income they rely on.

Filing for bankruptcy is a way that tenants can use to gain some relief. If there has already been an eviction scheduled because of nonpayment, a bankruptcy may afford some time, provided that the tenant can pay the outstanding amount within 30 days of filing the bankruptcy case.

A more complicated circumstance exists if a nonpayment case was pending. In that case, the prepetition rent is dischargeable, but post-petition rent is still due and enforceable. Still further, a tenant with an unexpired lease has to declare their intention with respect to the lease. If a tenant assumes the lease, they have to cure the arrearage. If the tenant rejects the lease, it’s terminated effectively immediately. Still further, bankruptcy cannot prevent a landlord from seeking a judgment of possession based on something not related to payment of rent.

If you’re interested in thinking of filing for bankruptcy to deal with unpaid rent, contact the Law Office of Richard Kistnen, (718) 738-2324, or email [email protected]

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