Rent and Rent Controlled Apartments in Bankruptcy

Two questions debtors often ask when they file for bankruptcy are whether they will have to pay their rent once they file for bankruptcy and whether they might lose their rent-controlled apartment if they file.

The obligation to pay rent for an apartment has two facets, much like a mortgage on a house.  One is the obligation to make the payment, the other is the right of the landlord to remove the tenant who does not pay rent.  This is similar to the situation with the home owner who files:  he or she has an obligation to pay the mortgage, and the bank has the right to foreclose if the payments are not made.

If a tenant who files for bankruptcy wishes to vacate the premises, they can do so without having to pay any rent for the unexpired term of the lease.  They also will not have to pay any rental arrears that might have accumulated at the time of filing.  If the tenant wishes to stay, then they have to pay their continuing monthly rent or the landlord can evict them despite the bankruptcy.  There is an automatic stay that prevents the landlord from evicting a tenant while in bankruptcy, but if the rent is not paid, the landlord can come to bankruptcy court and ask for permission to evict the tenant.  Some landlords will just wait the three months it takes for the bankruptcy case to close and then evict.  In either case, the tenant will eventually have to go.

It is important to note, though, that the rent that accumulates after the case is filed is not discharged in the bankruptcy and the landlord can try and collect the post-filing rent.  So if you are planning on leaving, you should time your filing to be at about the same time as you move.

If your rent is up to date and you continue paying the rent, there should be no problems with the landlord because they will usually never know there was a bankruptcy filing.  However, if your are looking for a new apartment and the landlord does a credit check, they will find out about the bankruptcy and that could have an effect on their decision whether to lease the apartment.

In New York, and perhaps in other parts of the country, there are situations where the rent that a landlord can charge is regulated.  In New York, the apartment can be rent-controlled, or rent-stabilized.  Both limit how much a landlord can charge and tenants often have apartments for which they are paying substantially less than market value for their apartments.  When this is the situation, bankruptcy can affect the right to stay in the apartment.

What happens is that the trustee that is assigned to your case will contact the landlord and ask the landlord if he is willing to pay the trustee a sum in return for having the debtor/tenant removed from the apartment.  This may seem cruel, and against the idea of giving a debtor a fresh start in bankruptcy, but so far, it has been approved by the courts.  If the landlord pays enough to make it worth while for the trustee to do the work, the tenant will be evicted despite any state protections that the tenant might otherwise have, and if the tenant does not move, the U.S. Marshals will actually evict the tenant.  It has been done a few times in New York.

When someone owns a house, they can exempt up to $150,000 in equity in the house, and up to $300,000 in a joint case.  But, sadly, there appears to be no exemption for the right to stay in a rent regulated apartment.  There are some cases working their way through the courts to assert such a right, but so far they have not succeeded.

Not all trustees engage in this sort of activity, and the rent has to be substantially below market value for the trustee to do so, but this is something that every tenant who is contemplating filing for bankruptcy should discuss with their attorney.