Shall I rent to this person? Seeking advice...

Question

We just purchased a house recently, and we are in the process of screening. Once stepping into the rental world, we found that it is quite hard to find someone who doesn't have credit history.

One person is willing to put in substantial security deposit, and two months and last month rent upfront. Sounds like a good deal. But he went bankruptcy before, and his current house is on short sale.

Here is our concern: what if he declares bankruptcy again after he rented our house and lived there? By law, do we have to return all his deposit to the bank for him to pay off his debt even if he is on a bad term(such as not paying the rent)? They look like a nice family, but we need to protect ourselves. To prevent this happens, can we write a clause in the leasing contract addressing this issue(not sure if by law we  could do this)? If OK, what should we write? Any other advice regarding our situation?

Really appreciate if you could give your valuable input. ---Connie

Robert Adams · Answer

"substantial security deposit, and two months and last month rent upfront." is more than average and sounds like a good deal to me.

in todays economy a lot of people have gone BK and have had to short sale so I would not hold that against them. You want to look for whether or not they are paying their current bills, do they have the income to support the rent, do they have evictions or collections from prior landlords, etc.

If you are worried about him claiming BK again find out when his discharge date was and what type of BK it was. From there you can determine how long until they are eligible to claim BK again. In most cases it is 7 years but you need to verify  the details.

"By law, do we have to return all his deposit to the bank for him to pay off his debt even if he is on a bad term(such as not paying the rent)? " Seek legal advice from your attorney.

Hope this helps.

Bill Gulley · Answer

If the bkry has been discharged, finalized they are fine from this angle, they can't take bkry again for 7 years, at least the same type, so in that respect they are a better risk than someone who has not gone there. Of they are in bkry, have them get a letter from the trustee authorizing them to enter into your lease with deposits if they are still listing creditors. If they are into bkry and have already submitted the list of creditors you should be fine as they are responsible for obligations created after the filing. But, I'd still seek the trustee's approval since they are entering into a cash transaction that could be set aside for creditors.

Connie Wang · Answer

Did some research, find a good article. Would like to share. :-)

http://www.bankruptcylawnetwork.com/landlord-security-deposits-in-bankruptcy-can-the-trustee-take-it/

James H. · Answer

Why would you have to give back the deposits? So he could send them back to you as a settlement for what he owes for breaking the lease....?

Connie Wang · Answer

Thank you all for the great advice!

George P. · Answer

sounds like a good deal to me. there will always be questions like "what if they split up? what if he loses his job? what if he slips and falls".

you can question yourself till you are blue in the face. just work with the facts, confirm all the info checks out and even get a month to month if you are still unsure.

most my tenants have filed for bankruptcy. come to think of it... i think it's all of them.

Steve Babiak · Answer

The above is BS - it is NOT "most" people looking to rent.  I have many tenants who have never owned a house, so they have no short sales in their history.  I have rejected many applications in the past couple of years, and I can say that I did not see any short sales among them (foreclosures and bankruptcies were seen).  Maybe my sample size isn't big enough, but since that was posted by somebody doing "lease options" mostly, it could be more typical for that demographic.

This is mostly true, although there are some tenants with great credit who don't want the bother / responsibility of ownership - and they are lifers.

Mike Neubauer · Answer

I have not run into a scenario where someone ever had to remit the deposits. Typically a deposit is forfeited to cover missed payments if they were to break a lease early. A bankruptcy is set up to discharge or reorganize debts, so I could see that through bankruptcy you wouldn't have ground to pursue a deficiency for a broken lease or missed payments. Typically, though it isn't worth pursuing anyways. I have paid non-paying tenants to leave before, which is completely opposite of pursuing them for missed payments. I now only do lease options. I feel like I get a higher quality of tenant, people that treat it a little more like their own home. Sometimes they stay, and sometimes they don't, but either way they typically take care of it along the way.

As far as bankruptcy or short sale on their credit, that is going to be quite typical of most people that are looking to rent. Anyone that has great credit will not be renting, or will be for only a short time. The last few years hit a ton of people causing wildly high amounts of bankruptcy, but it doesn't mean these are necessarily bad people or poor at paying their bills. Many were mislead and just got in above their heads.

One thing I do with all my tenants, which are all potential tenant-buyers is put in a clause that they must sustain a credit repair program throughout the lease. People that truly got dealt a bad hand of cards, and are trying to "right the ship" will be perfectly fine with this.

I know there are mixed reviews on credit repair, but I did it personally for clients as a mortgage broker before the amount of people got too overwhelming. Now, I refer them to a credit repair company. We have almost always had positive results. It won't clear up foreclosures and bankruptcies usually because those are public record, but lates and paid collections are almost a given.

Sorry to digress, hope this helps.