Eviction and Bankruptcy Remedies
The 120-day CARES Act eviction moratorium expired on Saturday, July 25. At the expiration of the moratorium, landlords covered by the federal moratorium could begin serving eviction notices, and begin filing eviction lawsuits 30 days thereafter.
That means on Monday, August 24, 2020 the moratorium on evictions will expire, while we face one of the most difficult times in our economic history. As I write this, I know many people cannot make their rent. This post is devoted to helping them.
Earlier this week, two of my consumer bankruptcy colleagues (Darya Druch and Cathy Moran) and I gave a short presentation on bankruptcy options available to people facing eviction to the National Housing Law Project, an organization based in San Francisco, California. If you are having trouble paying the rent (or mortgage), that website should be your first stop.
Here’s the outline of our presentation which had one overarching theme – the sooner you seek advice from a bankruptcy attorney, the more options you will have available.
Where bankruptcy can provide eviction relief, you have more options the earlier in the eviction process you file for bankruptcy.
Where you are in the eviction process determines how bankruptcy might help. Here are the usual scenarios.
Lease Not Terminated – Eviction Action Not Filed
Almost all states require landlords to use legal process to evict tenants. In California it is generally done through a court process known as an “unlawful detainer.” The eviction process usually begins with a termination notice for cause (usually a monetary breach). Receipt of a termination notice is the best time to talk to a bankruptcy attorney, because at that point the tenant has the most bankruptcy options.
A bankruptcy filing prior to the expiration of the allotted time to cure in a termination notice may extend the time to cure an additional sixty (60) days under 11 U.S.C. §108.
Absent a bankruptcy filing, some jurisdictions may deem a lease “terminated” unless the past due rent can be paid within the allotted time, or a non-monetary breach cured within that time. Once terminated, the lease cannot be restored under state law, except in jurisdictions that have anti-forfeiture laws, such as Code of Civil Procedure (“CCP”) §1179 in California.
A bankruptcy filing under Chapter 13 before the lease is terminated will not only stay an eviction under the bankruptcy code’s “automatic stay” (11 U.S.C. §362), but may also provide the tenant with an opportunity to cure any rent arrearage through a plan, as long as rent is paid current going forward. The Bankruptcy Code requires a “prompt” cure, the duration of which probably varies by court and may be longer than historically in light of the COVID-19 pandemic.
The automatic stay injunction protects the debtor’s right to possession unless the new bankruptcy filing is the debtor’s third case pending in the space of 12 months. The stay in a first filing remains in effect for the duration of the case or until the court lifts the stay, the case is dismissed, or particular property is no longer property of the estate. Chapter 7 cases typically run for 3 – 5 months. Chapter 13 cases for 3 – 5 years.
Lease Terminated – Eviction Action Not Filed
If the lease is terminated, a bankruptcy filing may still offer significant protection of the right to possession, and may offer an opportunity to cure and assume the lease under the Bankruptcy Code. The automatic stay of 11 U.S.C. §362 requires a landlord to appear in bankruptcy court and obtain relief from the stay before commencing or continuing an action against a bankruptcy debtor. At that stage, the tenant may still have the opportunity to “assume the lease” and cure any rent arrearage through a plan, as long as rent is paid current going forward.
Lease Terminated – Eviction Action Filed
A bankruptcy filing will stop the eviction action under the automatic stay, and provide the tenant with the same options as discussed above as long as there is no order for possession.
Lease Terminated – Eviction Action Completed and Judgment Entered
In California, an unlawful detainer judgment and writ of possession bestows legal title and all rights of possession back to the property owner, and there is no automatic stay violation by proceeding with the eviction. Eden Place v. Perl, 811 F.3d 1120 (9th Cir. 2016) Although Eden Place dealt with an eviction after foreclosure, the reasoning is fully applicable to a tenant’s possessory rights arising from landlord-tenant relationship.
There is still an avenue for relief, but only if the tenant can pay at least one month of future rent.
Under 11 U.S.C. § 362(b)(22), the automatic stay does not apply to the continuation of eviction proceedings brought by a lessor against a debtor involving residential property, unless the debtor satisfies 11 U.S.C. § 362(l). That subsection provides that the automatic stay will exist for 30 days following the date of the bankruptcy petition if the debtor files, with the petition, and serves upon the lessor a certification that (1) under the state or non-bankruptcy law that applies to the eviction judgment, the debtor has a right to stay in the property by paying the landlord the delinquent amount, and (2) if the debtor has deposited with the Clerk of the Bankruptcy Court any rent that would come due during the 30-day period after the filing of the petition. 11 U.S.C. § 362(l)(1).
If a debtor certifies on the bankruptcy petition that there is an eviction judgment—but fails to satisfy both components of § 362(l)(1) at the time that the bankruptcy petition is filed—subsection (b)(22) will automatically apply, and there is no stay of the eviction proceedings. 11 U.S.C. § 362(l)(4)(A). In re Oyarzun, 2017 Bankr. LEXIS 4351, at *7 (Bankr. W.D.N.Y. Dec. 21, 2017). However, sheriff departments may be reluctant to make that call, and require a Bankruptcy Court order anyway, which will usually take 14 days. Certain local Bankruptcy Courts may have further shortened those time deadlines.
Finally, if a debtor satisfies both components of § 362(l)(1) at the time that the bankruptcy petition is filed, and also cures the entire default within 30 days thereafter, the automatic stay will fully apply.
Evictions for Endangering the Property or the Illegal Use of Controlled Substances
The bankruptcy automatic stay has a further exception in 11 U.S.C. § 362(b)(23) for an eviction action that seeks possession of the residential property in which the debtor resides as a tenant under a lease or rental agreement based on endangerment of such property or the illegal use of controlled substances on such property.
The landlord must file and serve a certification under penalty of perjury that such an eviction action has been filed, or that the debtor, during the 30-day period preceding the date of the filing of the certification, has endangered the property or illegally used or allowed to be used a controlled substance on the property.
In that event, there is only a 15 day stay, during which the Debtor must file with the bankruptcy court an objection to the truth or legal sufficiency of the certification described, in which case the court will hold a hearing within 10 days to determine if the situation giving rise to the lessor’s certification existed or has been remedied.
Bankruptcy Can Eliminate Garnishments and Other Cash Drains that May Allow a Debtor to Pay Rent
If landlord is amenable to a payment plan and the tenant is otherwise having income garnished, bankruptcy can be a tool to increase available funds to pay rent either inside or outside the bankruptcy context. Bankruptcy may stop the garnishment upon filing, and eliminate the debt through the discharge.
Bankruptcy and Public Benefits
A governmental agency is not permitted to deny a public benefit because of a bankruptcy filing, because such discrimination is contrary to the “central purpose of the Bankruptcy Code to give debtors a fresh start.” In re Stolz, 315 F.3d 80, 87, 94 (2d. Cir. 2002) discussing 11 U.S.C. § 525. This is a broad topic worthy of a separate post, because like most areas of Federal bankruptcy law, nothing is what it seems.
For purposes of this post, a bankruptcy filing should not preclude a debtor from receiving public benefits such as Veterans Benefits, Social Security, unemployment, SNAP Benefit, and the like.
Section 8 housing may be trickier. A conflict exists among the courts as to whether Section 8 housing falls under Section 525(a). For example, In re Watson, 610 B.R. 747 (Bankr.S.D.N.Y. 2020) held that it did not, because private landlords participating in a federal subsidy program are not included in the Bankruptcy Code’s definition of a “governmental unit. In re Watson, 610 B.R. 747, 753 (Bankr. S.D.N.Y. 2020) Other courts disagree. In re Marcano, 288 B.R. 324 (Bankr. S.D.N.Y. 2003)
Bankruptcy law is complex, and in my experience at least, individuals that either choose to or have to file for bankruptcy without experienced bankruptcy counsel often find themselves actually worse off than they started.
To avoid that unfortunate result, anyone facing eviction and considering bankruptcy can visit the National Association of Consumer Bankruptcy Attorneys‘ (“NACBA”) website. NACBA is a nonprofit organization of over 2,500 consumer bankruptcy attorneys nationwide, and the only national association of attorneys organized for the specific purpose of protecting the rights of consumer bankruptcy debtors. A searchable online listing of NACBA’s consumer bankruptcy attorneys can be found at www.nacba.org/attorneyfinder.
Bankruptcy should be considered by anyone facing eviction, and an experienced consumer bankruptcy attorney should be consulted as early in the process as possible.
If you are overwhelmed with debt, facing unemployment, or unsure how to make next month’s rent or mortgage payment, now is the time to reach out and at least consider your bankruptcy options.
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