Before we give some general advice, we must provide this specific counsel: If you are aware of a tenant’s impending bankruptcy proceedings, you should contact your attorney right away.
When your tenant declares bankruptcy, you as the landlord become akin to their other creditors (although to be fair, your claims are considered higher priority than certain other debts). Your actions as the landlord of a “debtor-tenant” must be approved by the relevant bankruptcy court. Failure to operate within their guidelines could result in adverse litigation against the landlord.
What choices does a tenant have when they are faced with bankruptcy? They can do one of three things. They can
1) keep current with their lease agreement;
2) reject the lease, which requires vacating the property, or
3) assume or assign the lease to a third party. The bankruptcy court will allow a third party to assume the lease, even if the original lease agreement prohibits such an action. The court will typically require some proof that the third party is economically viable and that the assignation/assumption of the lease is a sound business decision on the part of the debtor-tenant.
The tenant has 120 days to make the decision about how to handle their lease; they may also be able to request an extension.
It behooves the landlord to be aware of all pleadings before the bankruptcy court, particularly the timing of any decisions or extensions.
Once bankruptcy has been filed, the landlord is limited in terms of action. The landlord cannot begin eviction procedures during this time and can face punitive damages if they do proceed in this direction. In addition, the landlord may or may not be allowed to utilize a security deposit to offset unpaid rent without the express permission of the bankruptcy court. Ultimately, if the debtor-tenant decides to reject the lease, the landlord may be entitled to collect funds, as a part of the bankruptcy settlement.