As a landlord, you’re likely prepared for a variety of tenant issues, late rent, maintenance emergencies, and lease violations. But what happens when a tenant declares bankruptcy? It’s not common, but when it does happen, it can leave property owners feeling confused, frustrated, and uncertain about their legal rights. While the idea of “bankruptcy” often carries a sense of finality, it’s not necessarily the end of the road for your rental income or your lease agreement. In fact, understanding what to do before, during, and after a tenant’s bankruptcy filing can help you protect your interests and make informed, lawful decisions. Here’s what landlords should know when facing this rare but critical situation.
What Is Bankruptcy, Exactly?
Bankruptcy is a legal process where an individual or business seeks relief from debts they can’t repay. When a tenant files for bankruptcy, they’re asking a federal court to either:
It’s important to know which type of bankruptcy your tenant has filed because it affects how you, as the landlord, can move forward.
The Automatic Stay: What It Means for You
An automatic stay goes into effect when a tenant files for bankruptcy. This legal freeze prevents creditors, including landlords, from pursuing collection efforts, initiating eviction proceedings, or engaging in communication about unpaid rent.
What you can’t do under an automatic stay:
- Send rent reminders or late notices
- File or continue an eviction
- Attempt to collect back rent
- Contact the tenant about the debt
Violating a stay can result in severe penalties, including fines or legal action against you.
Can You Evict a Tenant Who Filed for Bankruptcy?
It depends on when you filed the eviction and the reason for it.
If You Filed Before the Bankruptcy:
If the eviction judgment (also called a writ of possession) was issued before the bankruptcy was filed, you may be able to proceed. However, it’s smart to consult with an attorney or property management professional to avoid legal missteps.
If You Filed After the Bankruptcy:
The automatic stay will pause any new eviction efforts, even if the tenant hasn’t paid rent. To move forward, you must:
- File a motion for relief from the automatic stay with the bankruptcy court
- Wait for the court’s approval before proceeding
If the tenant’s bankruptcy case includes a plan to catch up on rent, the court may delay or deny your request to evict.
What Happens to the Lease?
Bankruptcy doesn’t automatically cancel a lease. The tenant (through the bankruptcy trustee) will decide to either:
1. Assume the Lease:
They agree to continue paying rent and abide by the lease terms.
2. Reject the Lease:
They give up the rental property, and the Lease is terminated. This allows you to regain possession.
If the Lease is assumed, you’re entitled to ongoing rent payments under the lease agreement. If it’s rejected, you may be entitled to damages, which become part of the bankruptcy estate and are subject to repayment. Though in reality, many landlords recover only a small portion.
Can You Collect Back Rent?
If a tenant declares bankruptcy and owes rent before the bankruptcy filing, that debt becomes part of the bankruptcy estate. You’ll need to file a proof of claim with the court to be considered for repayment.
However, understand that:
- You may be classified as an unsecured creditor, which puts you at the back of the line.
- Full repayment is not guaranteed.
- You cannot attempt to collect directly from the tenant.
In the future, the tenant must pay rent if they remain in the property, and the Lease is assumed. You can take action if they fail to pay the new rent after the bankruptcy filing.
How to Protect Yourself Before It Happens
You can’t predict every situation, but you can minimize risk by strengthening your tenant screening and lease agreements.
Smart Preventive Strategies:
- Thorough credit checks: Watch for high debt-to-income ratios or past bankruptcies.
- Clear lease language: Include specific terms for rent default and lease termination.
- Emergency Contact: In the event of legal or financial issues, an alternate contact can assist.
Working with an experienced property management company can also ensure you’re alerted to financial red flags earlier and respond appropriately when problems arise.
What Landlords Should and Should Not Do
- Pause any rent collection attempts immediately
- Consult with a property manager or bankruptcy attorney
- Determine if an eviction was already in progress
- File a proof of claim for back rent if applicable
- File a motion to lift the stay if eviction is necessary
- Document all communication and court filings
- Don’t contact the tenant directly about rent owed
- Don’t change locks or shut off utilities
- Don’t re-rent the unit until you have legal clearance
Why Professional Property Management Matters
Bankruptcy cases involve federal courts, strict legal deadlines, and formal communication rules. Missteps, even unintentional ones, can cost landlords time, money, and legal credibility. At Real Property Management Consultants, we understand the complexities of being a property owner. We are here to help you navigate tenancy issues, including tenant bankruptcy filings.
From communication protocols to lease decisions, we help you:
- Protect your property and income
- Navigate court filings and deadlines
- Ensure legal compliance
- Maintain professionalism and empathy
Final Thoughts: Stay Calm, Stay Informed
While tenant bankruptcies are rare, they can be a stressful experience for even the most seasoned landlord. The key is to stay calm, understand your legal options, and take action to protect your investment. With the proper support, you can manage the situation legally and professionally and come out stronger on the other side. Real Property Management Consultants is here to help landlords across the Kansas City area manage even the most unexpected rental challenges, including when a tenant declares bankruptcy. Contact us today to learn how we can safeguard your property, protect your income, and bring you peace of mind.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
