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The uncertain financial situation of the last few months has led to speculation about the future of the rental housing market and how the August expiration of national unemployment benefits could affect evictions. Filing for bankruptcy will affect tenants and landlords differently.

What Happens to a Tenant if Landlord Files for Bankruptcy

If a landlord has filed for Chapter 7, the court will likely take most of his/her assets and distribute them to creditors. If the rental property is subject to a mortgage, the mortgage may contain a clause called an “assignment of rents,” which could require any rental payments to be made directly to the mortgage company or bank instead of the landlord. If the mortgage does not contain such a clause, the Chapter 7 trustee may require that rental payments be made directly to him.

If a landlord files for Chapter 13 bankruptcy, he must propose to pay back debts using his income from all sources. In this situation, the rental payments will probably continue to be paid directly to the landlord and are included as one of his sources of income.

In either case, bankruptcy doesn’t immediately mean eviction. In a term lease, federal law says you can stay until the term ends. If the lease is month-to-month, there’s a 90-day grace period before a tenant can be evicted.

What Happens to a Landlord if A Tenant Files for Bankruptcy

Tenants that file for Chapter 7 have 60 days to decide if they’re going to stay on any lease. Landlords should still be receiving rent for that time, but any back payments most likely will not be made until the bankruptcy is resolved.

Tenants are not allowed to modify lease contracts in Chapter 13 bankruptcy proceedings. If you are behind on your rent and want to get caught up, a Chapter 13 will buy you some time, but it will require you to get caught up over a reasonable length of time––you are not allowed to use the full length of the plan to cure delinquent payments.

Other Things to Know

In Arkansas, landlords are not required to provide a “habitable dwelling” or make repairs, unless stated in the lease agreement.

Renters are entitled to get any security deposit back (minus repairs) within 60 days of the lease ending.

For those falling behind on rent, they could be served a “failure to vacate” notice and must leave the property within 10 days or face a criminal charge.

 

Whether you’re a tenant or landlord looking at bankruptcy, it’s important to know how the proceeding will affect everyone involved. Call the qualified and knowledgeable bankruptcy law team at Natural State Law today at (501) 916-2878 to learn more and schedule a free consultation.