Landlord and Tenant Issues in Bankruptcy, What happens when a Debtor is current in a Chapter 13?

The Phillips Law Offices practicing bankruptcy in Maryland, Massachusetts and Rhode Island

Chapter 13 cases are always a bit more complex when dealing with any issue that arises in comparison to Chapter 7 cases.  In Chapter 13 cases, lease agreements are dealt with in a much different way than in Chapter 7 cases.  However, unlike a Chapter 7 case, there are some core principles in a Chapter 13 case that do not change, whether the Debtor is current or behind, that must be followed and do not differ.

In a Chapter 13 case, the Debtor may assume or reject an unexpired lease of residential property anytime up to the confirmation of a Chapter 13 plan.  What does this mean?  The Debtor could have anywhere from 30 days to 60 months to either reject or assume the lease agreements.  Comparing this time frame to the Chapter 7 case, the Debtor only has 60 days to reject or assume.  Why such a difference in structure?  Each jurisdiction deals with confirmation of Chapter 13 plans differently.  In Maryland, the court schedules a confirmation hearing on a Chapter 13 plan within 60 days of the 341 meeting.  In Massachusetts, however, the court does not schedule a hearing regarding the Chapter 13 plan; instead, it could be months before a Trustee recommends confirmation to a court.  So you see with just these two jurisdictions, the deadline to reject or assume could differ greatly for the Debtor.

Therefore, a landlord needs to pay attention to the plans that the Debtor is filing.  Remember, a Debtor does not have to file just one plan.  Often Debtors file several plans in order to deal with amounts of arrears owed, priority tax amounts, etc.  Amounts owed to creditors often change on a plan because the Debtor may not be absolutely clear as to the correct amount until a creditor files a proof of claim.

If a Debtor rejects a lease agreement, the landlord should file a Motion for Relief of Stay and get possession of the property so as to minimize damages.  However, the landlord should also file a proof of claim with the amount due and owing on past due rent and for any unmitigated damages.  The Debtor will only have to pay a pro-rata portion of the past due rent and any other damages to the landlord.  The Debtor is no longer required to pay the terms of the full contract and any monetary damages listed in the proof of claim will be thrown in with the rest of the unsecured claims.

If a Debtor assumes a lease agreement, the landlord will look for the Debtor to provide adequate assurances that all defaults on rent payments will be cured or compensate the landlord for any financial loss resulting from the default.  The Debtor will also need to prove that there are adequate assurances of future performance of paying the rent on time and in full.

Debtors will often attempt to cure the past-due rent through the plan with all other unsecured claims.  The issue with this approach is that it is wrong.  A landlord has the right to object to any plan that does not provide for immediate cure of past due rents owed if the Debtor wants to assume the lease.  This raises the primary issue in these types of situations.

The Debtor is in a Bankruptcy case because he is financially challenged.  The real hope in going into a Chapter 13 case is that the Debtor will get some relief from some of the debt owed and will be able to pay certain debts in full on time each month as well as pay a plan payment that will account for the past due arrears on the debts that the Debtor wants to keep such as mortgages, car payments and rents.  The problem is that a Debtor, although experiencing some financial relief, does not have the ability to cure a large amount of rent payments prior to the confirmation of a plan.

How does one fix this cross roads?  I often work with the landlord if I am representing the Debtor, and vice versa if I am representing the landlord, by asking that the debt be considered a priority debt and the arrears be paid in full through the plan payments.  Some landlords can, and may, take this type of arrangement a step further pursuant to Title 11 by asking the court to require a wage garnishment of the Debtor’s pay for both the rent payments and a payment towards the arrears owed.  This seems like an extreme measure taken by the landlord; however, the Debtor often is on board with the wage garnishment because it is voluntary and it helps the Debtor stay current and reorganize.  Debtors often look for help in getting back on track with payments and staying current and this arrangement gives the Debtor one less thing to worry about.

Irrespective of what side I am on, I try to recommend a solution be worked out for either side if the Debtor really wants to stay in the rental property and if the landlord knows that Debtor is a good tenant.  Often if the burden of the unsecured debt is taken off the Debtor, the Debtor is able to cure past due rental payments and would be able to stay current, so for a landlord it is a good risk to take.