Filing the bankruptcy petition  

Individuals filing for bankruptcy usually do so under "Chapter 7" or under "Chapter 13". In a Chapter 7 bankruptcy, the debtor's assets (minus those exempted by the state) are liquidated and given to creditors, and 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 the bankruptcy law titled "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," a number of changes were made to the law which make it more difficult for persons to file a Chapter 7 bankruptcy. These changes also make it easier to evict under certain circumstances.   

Under the law, bankruptcy applicants who wish to file under Chapter 7 must meet certain eligibility requirements under a means test. The means test is aimed at reducing abusive Chapter 7 filings. If a debtor's income is sufficient to pay a significant part of his or her debts, the bankruptcy court presumes that granting the debtor relief under Chapter 7 is an abuse of the bankruptcy process. Under the means test, if the debtor's current monthly income is less than the median income in the state, the debtor can file for bankruptcy under Chapter 7. If the debtor's monthly income is above the median income in the state and he or she can afford to pay $100 per month toward paying off the debt, the debtor cannot file under Chapter 7 and must proceed under a Chapter 13 bankruptcy.   

Under the law, a debtor filing bankruptcy under Chapter 7 or Chapter 13 must show proof of income by providing federal tax returns from the previous year. The debtor must also submit all evidence of payments from employers for the 60 days prior to filing for bankruptcy with schedules and a statement of financial affairs.   

Under the law, a debtor may not file a petition for bankruptcy unless he or she completes an approved credit counseling course within 180 days before filing. Each debtor is required to file a certificate from an approved credit counseling agency that provided the services with the bankruptcy petition. A debtor may delay taking the course until after filing if he or she can prove the filing was caused by circumstances that could not have been known in time to take the course. 

Pre-petition vs. post-petition debts  

Whenever a bankruptcy petition is filed, the court will identify two separate types of debts. Pre-petition debts are debts incurred prior to filing the bankruptcy petition; post-petition debtors are those that are incurred after the filing of the bankruptcy petition. This becomes particularly important when determining whether you can proceed with an eviction action against a delinquent resident. If the only rent due is pre-petition debt, you will not have the right to go forward with the eviction action. Rather, the amount owed to you will be paid, or discharged, pursuant to whatever liquidation (in a Chapter7) or bankruptcy plan (in a Chapter 13) is authorized by the bankruptcy court.   

In many cases, the resident/debtor continues to be delinquent after filing the bankruptcy petition; consequently, the eviction action remains a remedy for the owner, but only after following the procedures identified below to lift the stay, if applicable.    

Automatic stay  

Pursuant to Section 362 of the bankruptcy law, a petition filed under the Bankruptcy Code operates as a stay applicable to: (i) the commencement or continuation of a judicial, administrative or other action or proceeding against the debtor that was or could have been brought before the commencement of the bankruptcy case; (ii) the enforcement against the debtor or against property for the estate of a judgment obtained before the beginning of the bankruptcy case; and (iii) any act to obtain possession of property of or from the estate or to exercise control over property of the estate. 

When a stay is not imposed 

Under the law, there are some additional exceptions to the automatic stay requirements of the Bankruptcy Code. The filing of a bankruptcy petition does not operate as a stay of the continuation of any eviction against a resident involving residential property in which the debtor resides as a tenant under a lease when the owner has obtained, before the date of the filing of the bankruptcy petition, a judgment for possession of such property.   A second exception provides that the automatic stay does not apply to an eviction action that seeks possession of the residential property in which a debtor resides as a resident under a lease based on endangerment of such property or the illegal use of controlled substances on such property, but only if the owner files with the court, and serves upon the resident, 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 property or illegally used or allowed the use of a controlled substance on the property. 

Assumption of rejection of the lease  

In bankruptcies under Chapter 7, an unexpired lease is automatically rejected (terminated) 60 days from the date of filing unless the lease is expressly assumed by the resident. In Chapter 13 bankruptcies, the lease is not automatically rejected until the court's confirmation of the debtor's reorganization plan, which could take a long time. Notwithstanding the assumption or rejection of a lease, if the resident fails to pay post-petition rent, you have the right to apply to the court to lift the stay so you can evict the resident for nonpayment of rent. 

Lifting the stay to allow eviction   

If one of your residents files bankruptcy, don't panic. The Bankruptcy Code outlines a procedure under which the stay can be lifted to allow you to proceed with the eviction. At this point, you should have counsel representing your interest in the bankruptcy court. Your counsel will need to file what is known as a motion to lift stay. Under rules for the Southern District of Texas, prior to filing the motion to lift stay, the party making the motion must attempt to contact the debtor's counsel to discuss whether an agreement can be reached by using the court's agreed order forms. If such an agreement can be reached, the parties may submit a motion for entry of the agreed order without the expense of preparing a motion for relief, the filing fee for a motion for relief, or the expense of attending a hearing.   

If the parties cannot reach an agreement, a motion to lift stay is necessary to obtain a court order that would allow you to proceed with your eviction. Once the motion is filed, the court will hold a hearing during which certain things must be shown in order to lift the stay to proceed with the eviction. The bankruptcy process to lift the stay usually takes about 30 to 45 days. 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. 

When lifting the stay is not necessary  

As discussed above, under the Bankruptcy Code, a stay is not imposed (and consequently, a motion to lift the stay would not be necessary) to continue an eviction if the owner has already obtained a judgment for possession against the resident.  Under the Bankruptcy Code, if a judgment is obtained prior to the filing of the bankruptcy petition, the stay provisions would not apply and the owner should be allowed to enforce the judgment by obtaining the writ of possession.  Also, if you are evicting the resident for endangering your property or illegally using controlled substances on your property, you do not need to move to lift the stay if you certify with the bankruptcy court that either (i) an eviction action based on these defaults has been filed (before the filing of the bankruptcy petition); or (ii) the endangerment to the property or the illegal use of controlled substances occurred within 30 days prior to the date you file your certification with the bankruptcy court. The 2005 amendments significantly changed bankruptcy law and may still need to be explained to the judge in the eviction action, because he or she may still be allowing eviction actions to proceed after a bankruptcy court lifting the stay is obtained. Unless an exception to the stay provision applies, if a resident files bankruptcy, the owner will have no choice but to have the stay lifted by agreement or with a motion to lift the stay in the bankruptcy court and obtain a court order lifting the stay prior to proceeding, or continuing, with the eviction action. Keep in mind that this applies to any estate, including, but not necessarily limited to, filing liens and giving notices of lease violation or notices to vacate. Caution should be taken to assure compliance with the bankruptcy provisions. By being knowledgeable about this issue, you can avoid unnecessary problems.