A Bankruptcy Primer for Self-Storage Operators: Understanding Your Role and Rights in This Legal Process

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What You Can Do

As a self-storage operator, your goal in bankruptcy proceedings may be two-fold. First, you hope to recover all or at least a portion of the rent previously owed for storage used prior to the filing, called the pre-petition debt. Second, you want to remove the debtor's property from the storage unit so the space can be leased to a new customer.

As to the recovery of pre-petition debt, it maybe painfully obvious the debtor has little or no assets from which an operator can hope to receive a full or partial recovery of unpaid rent. If that’s the case, your focus should be on the second goal. This can go one of two ways, depending on the relative value of the property held at your facility. Also remember you have a lien on the property stored in your facility. This lien may give you a priority over other creditors seeking a recovery from a shortage of assets.

If the property is relatively valueless or the debtor seeks a complete discharge, you may want to contact the trustee and see if it’s possible for him to abandon the stored property. If the trustee agrees and the abandonment is approved by the bankruptcy court, you may be able to proceed to auction and clear the unit. You should notify the trustee of any funds you receive at the auction to determine how they should be distributed.

If the property in the storage unit has value or the debtor seeks to reorganize his finances, the trustee may wish to hang onto it to pay creditors as a part of the discharge process. In this instance, you may want to contact the trustee to determine if the storage charges that occur after the petition is filed can be paid ongoing out of funds held by the trustee as administrative expenses of the bankruptcy estate. This process may take time, but it may be worth it to keep a paying tenant in your facility.

It’s important to note that storage charges that accrue after a petition is filed are not part of the bankruptcy itself. While operators are still bound by the automatic stay, these storage charges are not discharged as a part of the bankruptcy and may be pursued after the bankruptcy process is complete.

Other Key Considerations

Here are some more things to consider when dealing with a tenant bankruptcy.

Know the process. Prior to the start of any bankruptcy proceeding, familiarize yourself with the process and your local bankruptcy court. Know where the court is located and how you can contact it. Helpful information can be found at www.uscourts.gov.

Stop collections. If you’re notified a tenant is "filing for bankruptcy," stop any collection actions immediately. Contact the bankruptcy court to confirm a petition has been filed, the file number, when it was filed, a schedule of hearings and other important matters. In these cases, knowledge is a good thing.

Get listed as a creditor. Do not assume the tenant will remember to list you as a creditor. If that’s the case and you want to participate in the bankruptcy proceedings, you’ll need to notify the bankruptcy court. Remember, however, that even if you aren’t listed as a creditor, you’re still bound by the automatic stay once you have knowledge a petition has been filed.

File the claim. If you receive notice from the court that you are a creditor, complete and file the claim form included in the notice. Since you have a lien on the property stored, you may have a priority over other creditors. Be sure to complete and file the claim form on time. Plus, keep a copy for your records.

Attend hearings. There will be a series of hearings during the bankruptcy proceeding. One of these is the creditor's meeting normally held at an early stage with the trustee. Be proactive and attend. Many creditors write off the debt owed them and don’t participate in the bankruptcy process. However, because self-storage operators have ongoing relationships with debtors, you’ll want to determine whether the trustee may be willing to abandon the stored property or be able to pay ongoing storage charges as administrative expenses. Introduce yourself to the trustee and explain your situation to him.

Know military status. Individual debtors serving in the military pose a separate problem. Not only does the bankruptcy process govern them, there are separate considerations due to the Servicemembers Civil Relief Act. You should use extra caution when dealing with these types of cases.

Retain a lawyer. Depending on the situation and amount of funds at stake, you may want to retain a bankruptcy attorney to represent you. It’s always good practice to know one upon whom you can call. Remember, however, that you will be unlikely to recover any attorney's fees that you incur from the debtor.

The purpose of bankruptcy proceedings is to give people in financial distress a "fresh start." While it often appears to be unfair, it’s an accepted part of our financial world. By understanding the process—and your role and rights—you’ll be in a good position to make the best of a bad situation.

This article is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.

Bernard Fensterwald III is a consulting attorney with 25-plus years of experience. He’s licensed to practice law in Maryland, Virginia and Washington, D.C. He’s also a principal in U-Store Management, a Washington, D.C.-based self-storage company, and a past president of the Washington Area Self Storage Association. To reach him, e-mail fensterwald@mac.com; visit www.fensterwald.weebly.com.

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