What is the difference between a "secured claim," an "unsecured claim," and an "administrative claim" in bankruptcy?
There are three general types of claims in a bankruptcy.
- Secured claims are for debts backed by specific assets. For example, a car loan is secured by the car. Secured claims generally have the highest priority in a bankruptcy, with the secured creditor having the right to use the asset to pay off the debt.
- Unsecured claims are for debts that are not secured by an asset, such as credit card debt. This is generally any other type of debt that happened before the bankruptcy.
- Administrative claims are claims for new debts the debtor incurred after filing for bankruptcy.
The difference between administrative claims and unsecured claims is that administrative claims are generally paid before unsecured claims. This is important because the tenant may not have enough money to pay all of the claims in full. Administrative claims get paid before unsecured claims because bankruptcy law doesn't give debtors the benefit of taking on and discharging new debts after they already started the bankruptcy process.
A landlord may have both unsecured and administrative claims against a tenant. Any rent and other charges incurred before the tenant filed for bankruptcy are unsecured claims. If the tenant continues not to pay rent after filing for bankruptcy, the landlord may petition to have that handled as an administrative claim.
What is an automatic stay and how does it affect rent collection when a tenant files for bankruptcy?
When a debtor files for bankruptcy, their creditors are generally barred from any type of collection activity outside of the bankruptcy court process. Landlords may not terminate a lease or evict a tenant without going through the bankruptcy court. Landlords should also consult with an attorney before sending additional late payment notices or taking other collection actions.
This prohibition on taking action is known as a "stay" in legal terms. It is automatic because it takes effect just by the tenant filing for bankruptcy. A landlord may petition the bankruptcy court for relief from the stay if the tenant is damaging the property or if the tenant continues to not pay amounts that come due after the tenant files for bankruptcy.
For example, a tenant misses two months of rent before filing for bankruptcy. The landlord has an unsecured claim for those two months plus late fees or other charges under the lease. Then the tenant doesn't pay for the month after they filed for bankruptcy. The landlord now has an administrative claim for the additional month and can request that the court end the automatic stay and allow the tenant to be evicted.
May I terminate the lease after a tenant files for bankruptcy protection?
A tenant filing for bankruptcy protection does not automatically give you the right to terminate a lease. You would need a legal ground for termination, such as a violation of the no-pets provision in the lease agreement. If you found out your tenant had declared bankruptcy but had been fully complying with the lease agreement, you generally wouldn't be able to terminate their lease just for having declared bankruptcy.
Keep in mind that state and local laws may give tenants additional protections beyond federal bankruptcy law. In addition to seeking the court's permission to terminate the lease, you may also need to go through the state court eviction process. Keep in mind that tenants also have additional rights during the COVID-19 pandemic, including rights against evictions for nonpayment of rent during federal and state eviction moratoriums.
You and your tenant may mutually agree to cancel the lease if both parties believe it is in your best interests to do so. However, you should exercise care to avoid the appearance that you are forcing or pressuring the tenant to do so in violation of their bankruptcy rights.
What are the tenant's obligations after they assume or reject the lease following a bankruptcy filing?
A tenant typically does have the option to terminate their lease in bankruptcy. The default deadline for them to decide is 60 days after filing.
- If the tenant assumes the lease, they agree to continue to honor it. They must pay any future amounts as agreed and pay any past due amounts in full and in a timely manner as approved by the court.
- If the tenant rejects the lease, they may terminate it. The tenant's liability for future rent ends on the later of the date of termination or when they actually vacate the premises. The landlord may make a claim for any amounts owed as part of the bankruptcy process.
Understand your rights and obligations as a landlord
Because of the complexities involved in federal bankruptcy law as well as federal and local tenant protections due to COVID-19, it's always a good idea to learn as much as you can about the process and how it impacts you as a landlord. If you have specific legal questions, you'll want to discuss any type of action you're considering with a Rocket Lawyer On Call® attorney.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.