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Most “unsecured” debts are totally dischargeable in Chapter 7 or Chapter 13 bankruptcy, with only a few limited exceptions, so long as they were not incurred by way of fraud.
Back-Rent may be Dischargeable in a Chapter 7 Bankruptcy proceeding.
Rent owed on a residential lease is no different.
If you owe rent on a prior lease for an apartment or a rental home which you are no longer occupying, that rent owed is simply dischargeable. Period.
But what if you are still living in the home when you file your Chapter 7 bankruptcy case? What if you move out of the home after you file—but before your lease expires?
That complicates the picture.
Rental Arrears in Michigan Bankruptcy: Lease Commencement Timing Issues
The first thing to be aware of with regard to back-rent in bankruptcy is the fact that, as a matter of both logic and statute, a successful bankruptcy proceeding discharges only the debt you owed before you filed your bankruptcy case.
Obviously, if you file a Chapter 7 bankruptcy in 2020, and you rack up a new credit card debt in 2021, that year-old bankruptcy discharge is not going to help you with the debt in 2021. Why would it?
That is a cut-and-dry example, but less cut-and-dry is a scenario involving a contract signed before the date of the bankruptcy but pursuant to which performance by the parties continues during and/or after the bankruptcy proceeding.
A rental lease is a contract. The renter signs the lease and, generally, thereby agrees to pay some amount of money per month to the landlord in order for the right to reside in the premises described in the lease contract.
The usual Michigan rental lease charges rent per month but also stipulates a grand total amount which the renter (lessee) is obligated to pay by the lease expiration date. For example, if the rent is $100 per month (cheap!) for a term of 12 months, the renter is obligated to pay to the landlord a grand total of $1,200.00.
If the renter in that example resides in the property for 2 months and then files Chapter 7 bankruptcy, there is an unpaid balance of $1,000.00 that the renter would be able to discharge in the bankruptcy—IF the renter moved out of the property on the date of bankruptcy case filing.
So, again, what if the renter does not move out prior to the date of the bankruptcy case filing?
POST-FILING RENTAL ARREARS IN CHAPTER 7 BANKRUPTCY
The case-law has been split on the subject of whether rents owed for the months after the filing of a bankruptcy during which a tenant continues to reside in the property.
The question that the issue has revolved around is whether the debt owed by a tenant for months after the filing of a bankruptcy during which the tenant continues to occupy a rental home is dischargeable where the lease was signed prior to the bankruptcy filing.
In a Chapter 7 bankruptcy, a debtor in bankruptcy has the option to assume or reject a lease or contract by making a declaration one way or another in the bankruptcy petition.
Assumption of a lease means that the debtor is agreeing to remain obligated to its terms.
Rejection is just what it sounds like: an intention to discharge the obligation.
However, in Chapter 7 bankruptcy, the Chapter 7 Trustee first has the opportunity to assume or reject a lease or contract. (This post will not fully describe who the Chapter 7 Trustee is or what that person’s powers and duties include. See my post on the Role of the Chapter 7 Trustee)
If the Chapter 7 Trustee does not affirmatively assume a lease or contract within 60 days of the date of Chapter 7 filing, it is considered rejected—and the debtor then has the option to assume or reject (already generally pre-opted in the petition as described above).
This dynamic is more relevant in the case of lease for personal property, such as an automobile lease. A Chapter 7 Trustee will generally not assume a lease for a residential tenancy, unless the debtor is the landlord and the assumption means that the Chapter 7 Trustee can collect rents by doing so.
Regardless of this assume/reject election by the debtor-tenant, if the tenant continues to reside in the rental property, courts have either decided that they owe on a per diem basis for the post-filing time during which they continued to occupy—or they have decided that they do not.
The reason that courts have sometimes decided that a debtor-tenant does not owe is predicated in the idea that the lease was signed before the bankruptcy case’s filing and is, therefore, a pre-petition, dischargeable debt.
Those courts have determined that, if the landlord fails to move to evict a non-paying tenant post-bankruptcy, it is, essentially, the landlord’s problem.
BACK RENT & CHAPTER 7 BANKRUPTCY: THE LOCAL RULE
Until recently, here in the Eastern District of Michigan, the general rule, depending upon which judge was assigned to your case, was that, if a tenant continued to occupy a premises post-bankruptcy-filing, they were liable for the rent at the contractual (lease) rate for that time.
However, in May of 2019, the 6th Circuit Court of Appeals Bankruptcy Appellate Panel (“B.A.P.”) ruled in an unpublished decision In re Roberson, that a debtor’s rejection of an unexpired lease in the bankruptcy petition was a pre-petition breach of the lease—and, therefore, a pre-petition debt that is entirely dischargeable.
BACK-RENT & CHAPTER 7 BANKRUPTCY IN MICHIGAN: THE BOTTOM LINE
The bottom line here is that, if you are tenant filing for bankruptcy, you will need to discuss your intention with regard to your rental residence (to stay or to go and when) with your Michigan bankruptcy attorney when you initially meet and during the preparation of your bankruptcy petition.
If you assume your lease, you will remain obligated. If you reject it, you may not. If you reject it but intend to stay, your landlord will have the right to file a motion with the Bankruptcy Court to proceed to evict you post-filing, even if that was not your intention.
For a discussion on how bankruptcy might help stop an eviction in Michigan, read my blog post “Can Bankruptcy Stop an Eviction?”
To discuss your bankruptcy filing with an experienced attorney, contact The Law Offices of Walter Metzen & Associates now to schedule a no-cost, no-obligation initial consultation.
