Who is crazy enough to rent to someone planning to file bankruptcy?

Question

I got a call from a prospect who was upfront with me about her plans to file bankruptcy.

For landlords, this is just asking for punishment, isn't it.

I haven't met her yet, but she says she has enough to cover her rent and family expenses. (I'll be the judge of that though)

Dan Taylor · Answer

My first question without hesitation would be:
             "Why are you filing for bankruptcy?"

Bankruptcy, while viewed negatively by most, can actually be the best option for her. For instance, a friend of mine was married to a man who owned a very successful business and he used their house as collateral for over $75k in loans for business equipment. Through the divorce a few years later, the deed was signed over to her in lieu of back child support. Some 13 years later, the creditors who loaned on the equipment came calling and she was saddled with the debt. Unable to afford the payments, Bankruptcy was her only option. Having reviewed her credit report with her, she, in 26 years of credit history, had NEVER missed a payment and had ALWAYS paid more than the minimum on her balances. Unfortunately, she just married a prick.

Point is, investigate. If she can provide a legitimately good reason for the bankruptcy and has documentation to supplement her reasoning she may be worth considering. Odds are she's financially incapable of managing her affairs, but that isn't ALWAYS the case. Good Luck!

Bill Gulley · Answer

Actually, you don't have a problem, have her sign a statement that she intends to file bankruptcy and agrees to reaffirm any debt under the lease. Contracts made in contemplation of bankruptcy are not covered in a bankruptcy. Giev her a copy for her attorney, in fact, have her attorney draft the letter and reaffirmation.

BTW, she did the right thing by informing you! :)

Bill Gulley · Answer

Dan makes a very good point, the reason for the BK. Medical bills as a reason with a good prior history are viewed much differently than poor money management, divorce can be as well as the debts can be reviewed to see who that bad guy is in some cases.

Mike, I know it's the Republic of Cali, but it's federal law, a contract entered into in the contemplation of bankruptcy will be subject to being set aside, regardless of what Cali attorneys think. Now, if you have a Trustee in that jurisdiction that pokes holes in the concept of defrauding a creditor you might go with what that Trustee/judge seems to side with, which your attorneys may have insght to.

An agreement to reaffirm a debt made prior to filing may not be valid, especially if it's a reaffirmation made as part of the contract and made a significant time prior to any filing. A seperate agreement made just prior to filing will carry much more water being done in contemplation of filing. The look back is one year, but if you're within 30 days of filing that's a better position.

A letter to reaffirm a debt specifically addressing a particular filing is gold and will be unlikely to be included unless it places other creditors at a disadvantage or appears to have some odor to it.

I was a Creditor's Representative here in BK court (appointed by the court) and I've used the reaffirmation route through the debtor's attorney. :)

Deborah Burian · Answer

Post the economic melt-down we have rented to several tenants who had recent bankruptcies.  They had jobs that would cover the rent, no other 'bad' behaviors, ie. history of eviction (HATE that), and since lots of people told them no before they got to us, tended to be appreciative, high quality tenants.  Pending bankruptcy is somewhat different but would at least consider based on screening.  A large number of bankruptcies are related to medical bills as opposed to profligate behavior.

Jon K. · Answer

I wouldn't rent to someone who is ABOUT to file bankruptcy.

I probably wouldn't even rent to someone with a recent bankruptcy. I want to see a responsible tenant who can afford their lifestyle and pays their bills on time-- if they don't pay their bills, I assume they won't pay me either. Same with large recent collections. I had a tenant who was sued for $15K plus in credit card debt in recent months. She made $30K a year before tax, plus had a primary residence with a partner/spouse/whatever that would eat up more of her income. Yeah, no. She was sued for debt worth half her annual pre-tax income. I can't imagine how she could have paid me rent after that. It didn't appear she paid the previous credit card creditors, either.

What if they don't get approved for the bankruptcy?

What if they have no money management skills, causing their bankruptcy?

What if your area doesn't protect landlords in this situation?

It's good that she at least was upfront about it.

Mike Franco · Answer

Unfortunately, what Bill said is not true in California.

According to multiple attorneys I asked, a lease cannot be bk-proof, even prior to the lease being signed.

A signed statement from a prospect also does not stop the landlord from being named as a future creditor.

Basically, the old rules still apply- screen well to minimize risk.

I met the prospect today, and she told me her husband and son just went to an MLB baseball game.
Yeah, now I know why she's planning to file for BK. She and her husband still have bad spending habits.

Bill Gulley · Answer

You betcha guys, should be a great tenant, they can't take the same BK again for 7 years, so that risk is gone for awhile. :)

Matt Devincenzo · Answer

Bill Gulley good to know, thanks for that pearl of wisdom.

Mike Franco · Answer

Thanks Bill

I learned something new today.

Steve Babiak · Answer

Other existing relevant threads:

http://www.biggerpockets.com/forums/52/topics/73342-renting-to-people-about-to-file-bankruptcy

http://www.biggerpockets.com/forums/102/topics/65246--automatic-stay-for-tenant-that-just-filed-bankruptcy-

http://www.biggerpockets.com/forums/52/topics/77420-tenant-files-bankruptcy

Who is crazy enough to rent to someone planning to file bankruptcy?

Most Popular Reply