The Bankruptcy Game

Posted By: Nicole Zaitoon Legislative Updates ,

Like many of you, my first rental property portfolio was risky. As the sole proprietor, I carefully managed my acquisitions and deposition, paid cash for deals, and occasionally did partnership deals. Since there were no mortgages on the properties and my expenses were extremely low, I could survive on the cash flows. My investment strategy focused on properties in the same class and price range. These deals were in the same neighborhood and, when possible, adjacent to each other.

My competition was fierce. Concessions and special provisions dominated the market. Utility and transportation costs were outrageous. After initial funding, my banker was friendly but stingy with additional funds. Taxes, the prospects of jail time, and pure happenstance were always threatening.

The market rents were fixed, the cap-rates suspect, and my rent collection erratic. I was quick to evict non-payers and took immense pleasure when my renters declared bankruptcy. Success depended on pure chance, a roll of the dice.

The D/FW rental real estate business is such a small world. However, I have discovered that many of my colleagues either rented or owned some of these same properties.

My first rental properties were: St. James Place, Tennessee Avenue, New York Avenue, Kentucky Avenue, Indian Avenue, and Illinois Avenue. Reds and Oranges were my winning strategy. I avoided the Greens and never won while owning Park Place and Boardwalk.

It may surprise you that Monopoly was originally called “The Landlord’s Game.” Now that we are all playing Monopoly for real, seeing renters declare bankruptcy is not as fun as it is in the game.

The post-COVID world continues to impact our industry. As we move into the second half of 2022, we anticipate resident bankruptcy to be one of the most onerous lingering effects of the pandemic. All signs indicate an increase in the volume of tenant-bankruptcy claims. This increase reflects a rise in consumer debt, inflation, energy prices, and delinquent rental balances. For example, if a tenant owes their landlord $10,000 in past-due rent, $25,000 to credit card companies, $2,000 in late car payments, etc., and they have lost their job or had their deposable income dramatically reduced due to inflation and rising gasoline prices, then bankruptcy is a potential option.

The good news is that AATC members have the REDBOOK as a resource. The unwelcome news is that, like pauper affidavits, most tenant-bankruptcy claims are merely eviction delay tactics.

To help you better understand how to respond to a resident’s bankruptcy, read the TAA REDBOOK article “Debtor Dilemma” by Houston Apartment Association General Counsel Howard Bookstaff.

In this article, Bookstaff explains that most renters filing for bankruptcy do so under “Chapter 7” or “Chapter 13”. In a Chapter 7 bankruptcy, the debtor’s assets (minus those exempted by the state) are liquidated and given to creditors. Many of the debtor’s remaining debts are canceled, giving the debtor what is known as a “fresh start.” In a chapter 13 bankruptcy, the debtor is put on a repayment plan for up to five years.

Any debts not addressed by the repayment plan don’t have to be paid.

Under bankruptcy law, a tenant’s petition operates as a stay. In other words, all court action stops—including evictions. Bookstaff says that if a resident files for bankruptcy: “don’t panic.” The law contains a procedure under which the stay can be lifted to allow you to proceed with the eviction.

You’ll need an attorney to represent your interest in the bankruptcy court. Your counsel will need to file what is known as a ‘motion to lift stay’ with the U.S. Bankruptcy Court. The good news for Tarrant County owners/operators is that the U.S. Bankruptcy court for all North Texas is in Fort Worth (501 W. 10th St., Fort Worth, TX 76102 (817) 333-6000).

The entire process to lift the stay usually takes about 30 to 45 days. However, the result of a favorable ruling from the bankruptcy court is that an order lifting the stay will be granted. That order can then be taken to the judge in the eviction action, and the eviction can proceed.

It is absurd that the resident gets to stay in their unit rent-free before you can evict them --whether they live on Baltic Avenue or Boardwalk!  

Nicole Zaitoon, Allied Property Management, is AATC’s 2022 Government Affairs Committee Chair and a member of AATC’s Board of Directors.