The Issue of COVID-Driven Debt: How to Proceed When Your Self-Storage Tenant Files Bankruptcy

The Issue of COVID-Driven Debt: How to Proceed When Your Self-Storage Tenant Files Bankruptcy
Many people are facing financial strife due to the pandemic, and some will seek bankruptcy as a solution to alleviate their debt. If this is the case for any of your self-storage tenants, there are strict rules you must follow. Understand how to proceed.

When you come to read this article, I hope the light at the end of the coronavirus tunnel is getting brighter, more vaccines are rolling out, and life is starting to get back to normal, whatever that is. Just remember that your self-storage tenants are still facing challenges, including financial hardship.

Early in the pandemic, you might’ve heard about government orders being passed including eviction moratoriums and foreclosure forbearance. As these measures are lifted, that piper will need to be paid. Many of your customers will find themselves facing evictions or foreclosure claims for unpaid rent or mortgages, which could easily reach many thousands of dollars. This is on top of deferred utility bills, credit card payments and other financial obligations creditors haven’t been able to collect. As all this debt comes due, your customers may not be able to pay what they owe, which may lead them to file for bankruptcy.

If ever you are put on notice that a tenant of yours has filed for bankruptcy, you must act appropriately to avoid legal risk. This article explains what you need to know about the filing and what actions you need to take.

Respect the Filing

The problem with bankruptcy law is it’s counterintuitive. What you may think would be right and fair is sometimes exactly the opposite. The law is written to protect the debtor, not his creditors. It doesn’t matter if you disagree with that concept. A violation of a bankruptcy order can result in contempt of court. You could face paying damages to the debtor and even be forced to pay his attorney’s fees. Contempt-of-court orders could also include jail time!

It’s also important to know that you can be involved in a bankruptcy even if the debtor doesn’t owe you money at the time of filing. This happens because you can be listed in the bankruptcy petition for reasons other than being a creditor, for example, holding a security deposit.

In addition (and this is important): Just because you don’t receive formal written notice from the tenant or the court of a bankruptcy, any oral or implied notice is good enough. At that point, you must assume a bankruptcy has been filed and act in accordance with the rules. So, if a tenant or someone who knows him tells you he has filed or plans to file—even if you haven’t received written notice—the burden shifts to you. You must determine whether this alleged filing is true before acting against your tenant or proceeding with collections.

Understand the Automatic Stay

The first concept you need to understand about bankruptcy is the automatic stay. As soon as a bankruptcy is filed with the court, an automatic-stay order is issued without the judge even seeing the filing. This gives the debtor protections under bankruptcy law, which provides that no creditor may take any action to collect a debt once the bankruptcy is filed. This is true even if you believe it’s filed in bad faith.

These actions include the commencement or continuation of any sort of judicial proceeding. In self-storage, that would refer to sending bills, late notices, automatic texts, imposition of additional fees, lien notices, or conducting lien sales or evictions. As soon as you believe or know a bankruptcy has been filed, you must stop everything you’re doing to collect that tenant’s debt. This means halting all automatic services such as automated texts or calls, lest you violate the automatic stay.

Get a Social Security Number

Tenant bankruptcy is one reasons why it’s so important for you to obtain the tenant’s Social Security number (SSN) at the time of rental. If ever he files for bankruptcy, or alleges he has, his SSN is the best way for you to confirm that. It allows your attorney to check the federal government’s court-docket system.

If a tenant says, “I’m filing for bankruptcy,” and you’re a couple days away from a lien sale, you can use his SSN to verify that statement and know whether you need to stop the auction. Without this vital piece of information, your hands are tied, and you must stop just based on his word. Many tenants will tell a self-storage operator they’re going to file but don’t actually do it. Without the right information, you’ll be stymied.

Find Out the Filing Type

Once you have word, rumor, notice or even innuendo of a bankruptcy, it’s time to call your attorney. He’ll ask whether you know the chapter of bankruptcy filed.

Most bankruptcies involving your tenants are Chapter 7, which is an attempt to discharge all unsecured debt and even some secured debt. There’s also Chapter 13, sometimes known as a wage-earner plan, whereby the bankruptcy runs for a period and the debtor pays off some or all the debt through garnishment of wages into a plan. If this is the case, you’ll need to provide proof of claim to the court to participate. Chapter 11 is a business reorganization, similar to a Chapter 13, but more suited for companies rather than individuals.

Work Your Remedy

One of the most common mistakes made by self-storage operators is trying to negotiate some sort of repayment of the past-due rent with the tenant after he files for bankruptcy, with or without move-out. This violates the automatic-stay order!

Thankfully, you do have a remedy. You don’t have to wait for months or years for the bankruptcy to resolve itself. Rather, you can negotiate for the tenant to leave. To be safe, your attorney should oversee these negotiations. If the tenant is unable or unwilling to vacate, your attorney can file a motion for relief from the automatic stay, which the court would be able to grant. This allows you the right to remove the tenant from your storage unit.

Understand, though, that this approach can be extremely complicated, particularly with Chapter 11 bankruptcies. It’s become even more convoluted since the Consolidated Appropriations Act (CAA) was passed in December. It seems to have extended the time for a lease rejection. Thus, working with your attorney is exceptionally important.

The CAA also altered the rules for preferential payments, which are those you may receive from your tenant before he files bankruptcy. If you plan to take payments from a customer in default, speak to your attorney, especially if you fear the tenant might file bankruptcy in the near future. Your legal representative can help you potentially avoid these monies being recouped under the new preference guidelines in the bankruptcy code.

Remember, if the tenant isn’t going to pay you after filing bankruptcy, have your attorney negotiate a move-out. This is your best remedy. Don’t allow a debtor who’s filed to simply remain in your space without payment just because you don’t understand your rights under the code.

Bankruptcy is a tricky area of the law. If you have a tenant who has or could file for bankruptcy, don’t think you can handle it yourself. Contact your attorney and let him help you through this. It may cost you a few dollars, but the representation will, in this instance, be well worth the legal fees.

This column is for the purpose of providing general legal insight into the self-storage field and shouldn’t be substituted for the advice of your own attorney.

Jeffrey J. Greenberger is a partner in the Cincinnati law firm of Greenberger & Brewer LLP. Licensed to practice in Kentucky and Ohio, he focuses primarily on representing the owners and operators of commercial real estate, including self-storage. His website, selfstoragelegal.com, contains legal opinions and insights as well as an article archive. To reach him, call 513.698.9350; email jeff@grbrlaw.com.

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