No Money!

by Jason Busboom, Busboom Group, AATC's Government Affairs Committee Chair

Don't panic when a tenant files bankruptcy.

Like many of you, my first rental property portfolio was a bit risky. As the sole-proprietor, I carefully managed my acquisitions and deposition; mainly paying cash for deals, but occasionally doing partnerships. Since there were no mortgages on the properties and my expenses were extremely low, I was able to survive on the cash-flows.

My investment strategy focused on properties in the same class and price range. For the most part, these deals were in the same neighborhood and, when possible, adjacent to each other.

My competition was fierce. Concessions and special provisions dominated the market. Utility and transportation costs were outrageous. After initial funding, my banker was friendly but stingy with additional funds. Taxes, the prospects of jail-time, and pure happenstance were always threats.

The market rents were fixed; the cap-rates suspect; and my rent collection erratic. I was quick to evict non-payers and took great pleasure when my renters declared bankruptcy. Success depended on pure chance, a roll of the dice.

The D/FW rental real estate business is such a small world. I have discovered that many of my AATC and AAGD colleagues either rented or owned some of these same properties.

My first rental properties were: St. James Place, Tennessee Avenue, New York Avenue, Kentucky Avenue, Indian Avenue, and Illinois Avenue. Reds and Oranges were my winning strategy. I avoided the Greens and never won while owning Park Place and Boardwalk.

It may surprise you to learn that Monopoly was originally called “The Landlord’s Game.” Now that we are all playing Monopoly for real, seeing renters declare bankruptcy is not near the fun as it is in the game.

The good news is that the volume of tenant-bankruptcy claims continues to decline. This decrease is mainly due to our industry’s relentless decade-long advocacy efforts in Washington to enact “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” This federal statute made a number of significant changes that make it more difficult for persons to file a Chapter 7 bankruptcy. These changes also make it easier to evict under certain circumstances. The bad news is that, like pauper affidavits, most tenant-bankruptcy claims are merely eviction delay tactics.

To help you better understand how to respond to a resident’s bankruptcy read the TAA REDBOOK article “Debtor Dilemma” by Houston Apartment Association General Counsel Howard Bookstaff.

In this article, Bookstaff explains that most renters filing for bankruptcy do so under “Chapter 7” or under “Chapter 13”. In a Chapter 7 bankruptcy, the debtor’s assets (minus those exempted by the state) are liquidated and given to creditors, and many of the debtor’s remaining debts are canceled, giving the debtor what is known as a “fresh start.” In a chapter 13 bankruptcy, the debtor is put on a repayment plan for up to five years. Any debts not addressed by the repayment plan don’t have to be paid.

Under the bankruptcy law, when a tenant’s petition operates as a stay. In other words, all court action stops—including evictions. Bookstaff says that if a resident files bankruptcy: “don’t panic.” The law contains a procedure under which the stay can be lifted to allow you to proceed with the eviction.

You’ll need to get an attorney to represent your interest in the bankruptcy court. Your counsel will need to file what is known as a motion to lift stay with the U.S. Bankruptcy Court. The good news for Tarrant County owners/operators is that the U.S. Bankruptcy court for all North Texas is in Fort Worth (501 W. 10th St., Fort Worth, TX 76102 (817) 333-6000).

Be sure to contact one of AATC’s attorney members to help you with this action. AATC has an outstanding Legal Services Program. To learn more about this member benefit go to http://www.aatcnet.org/legal-services-program.html

The entire process to lift the stay usually takes about 30 to 45 days. The result of a favorable ruling from the bankruptcy court is that an order lifting the stay will be granted. That order can then be taken to the judge in the eviction action and the eviction can proceed.

Yes, it is absolutely absurd that the resident gets a month’s free-rent before you can evict them. Prior to the enactment of the 2005 statute, tenants were living free indefinitely – whether that lived on Baltic Avenue or Boardwalk!