Bankruptcy and the Eviction Moratorium

 Posted on September 14, 2020 in Financial Crisis

The CDC’s recent order stopping all U.S. residential evictions gives you a new tool to use with some wise bankruptcy planning.

Last week’s blog post was about a new federal order temporarily stopping certain residential evictions throughout the country. Please see that blog post about which renters and rental properties are covered, and how renters qualify for the moratorium.

If you are a tenant and are considering filing bankruptcy, this eviction moratorium can affect the timing and tactics of your filing. We start addressing that today.

The Moratorium Ends on December 31, 2020

The most important aspects of the eviction moratorium are that it is temporary and does NOT forgive any rental payments. The “order prevents you from being evicted or removed from where you are living through December 31, 2020.” However, “[y]ou are still required to pay rent... .”

The obligation to pay the rent is just delayed. “[A]t the end of this temporary halt on evictions on December 31, 2020, [your] housing provider may require payment in full for all payments not made prior to and during the temporary halt... .” Your “failure to pay” then would make you subject to eviction at that point. 85 Federal Register 55292, 55297.

Note that you would almost certainly then owe more than just the missed rental payments. You also continue to be liable for “fees, penalties, or interest for not paying rent” imposed under your lease agreement. See Declaration, p. 2.

The Bankruptcy Timing Consequences—Chapter 7 “Straight Bankruptcy”

Bankruptcy generally allows you to discharge—permanently write off—debts that you owe at the time you file the bankruptcy. It does not discharge future debts.

So one seemingly straightforward option is to delay filing a Chapter 7 bankruptcy, then file to discharge the accrued rent. Any other contractual fees and penalties could also be discharged. Assuming you qualify for the moratorium, this lets you live rent-free for several months.

The crucial practical question is whether you’d be able to continue living at this rental or would have to move.

The situation is relatively simple if you do move away at that point. You would be liable for any rent or other fees accrued after you and your bankruptcy lawyer file your case. That’s because again the bankruptcy discharge does not cover any obligations accrued after the filing. So you’d have to move before or at the time you file the Chapter 7 case. Or else you’d have to pay rent and any other fees accrued after the date of your bankruptcy filing.

Staying at Your Rental after Filing a Chapter 7 Case

But could you discharge any pre-filing obligations to your landlord and continue living there by paying all after-filing obligations? There’s a legal answer and a practical one.

The legal answer is very likely “no.” You have to pay the pre-filing obligations if you want to stay. After filing a Chapter 7 case you have a short time to decide to “accept or reject” the lease agreement. You have 60 days. If you “reject” it, you leave and then usually don’t owe any pre-filing obligations to your landlord. If you “accept” the lease agreement, you have a very limited time to pay any pre-filing obligations. If you don’t accept the lease agreement on time, your landlord can evict you. Or if you do timely accept your lease but then don’t pay the pre-filing obligations on time, your landlord can also evict you. (See Section 365 of the Bankruptcy Code on unexpired leases, one of its more complicated provisions.)

Notwithstanding all this, under some circumstances you might be able to persuade your landlord to let you stay. We live in crazy times. Your landlord may have multiple renters unable to pay their back rent, and may prefer that you stay. Your bankruptcy filing, in which you’re presumably discharging lots of other debts, will likely make you better able to afford your rent. The landlord may be open to negotiating something you can live with.

Obligation to Make Partial Rental Payments

Relatedly, be aware that to qualify for the eviction moratorium you have to try to make partial rental payments. You have to certify the following:

I am using best efforts to make timely partial payments that are as close to the full payment as the individual's circumstances may permit, taking into account other nondiscretionary expenses...

85 Federal Register 55292, 55297.

The point of this is that it opens you and your bankruptcy lawyer to some creative planning and negotiations. You could agree with your landlord to make partial rent payments during the period before filing bankruptcy (which you could otherwise discharge). In return you or your bankruptcy lawyer could ask for the landlord’s flexibility about payment terms after your bankruptcy filing.

Or more likely, you use the threat to reject the lease and discharge all the pre-filing debt as leverage. Instead you agree to accept the lease but pay only part of the debt and/or get payment terms you can tolerate.

A Chapter 13 Teaser

As you can see Chapter 7 is quite helpful, used with the eviction moratorium, if you’re leaving the rental property. You live there without paying the rent for months and then discharge that obligation in bankruptcy.

But if you want to stay, Chapter 7 leaves you to a large extent at the mercy of your landlord. You only get a bit of leverage, which may or may not work with your particular landlord.

What if you could legally force your landlord to give you much more time to catch up? What if you had many months to pay the rent not paid during the moratorium? In our next blog we’ll show you how a Chapter 13 “adjustment of debts” case may let you do this.