An unprecedented amount of unpaid rent makes bankruptcy a more attractive option for millions of Americans struggling with paying homeowners as Covid-19 relief measures end.
Renters generally cannot use bankruptcy to avoid eviction unless they can work out a plan to pay off the rent accrued. But for tenants willing to give up their leases, the process can slow down an eviction and leave them off the accumulated rent debt. And this feature is expected to gain more tenant attention as the federal government’s moratorium on evictions is due to expire on June 30.
Nearly 7 million Americans said they were behind on rent at the end of April, according to the US Treasury Department. Some 5 million more tenants were not convinced they could cover future payments.
“Until the pandemic, unpaid rents weren’t really a reason people went bankrupt,” said consumer bankruptcy lawyer Jay Fleischman of Shaev & Fleischman PC. “With so many people behind on their rent payments, I expect a dramatic change.”
People don’t usually go bankrupt to pay off a single debt, such as overdue rent, or to delay eviction proceedings. The process does not automatically void a landlord’s right to dismiss delinquent tenants.
Most often, it is used as a last resort for homeowners facing foreclosure or those burdened with a multitude of different debts.
But eviction protections established last year at the federal and state levels have helped create a “unique situation” for people who owe more than they can repay and are able to relocate, said John Rao, lawyer at the National Consumer Law Center. .
“It is certainly expected that deposits will increase once these moratoriums are no longer in place,” US Bankruptcy Court Judge Kathy A. Surratt-States for the Eastern District of Missouri said at a virtual conference in the month. latest.
Bankruptcy should give delinquent tenants the opportunity to move out on their own terms and eventually pay off the debt that has accumulated, she said.
Tenants who want to keep a residential lease in bankruptcy typically file Chapter 13 to develop a multi-year plan that pays past debts over time. But avoiding bankruptcy eviction can be difficult, lawyers say.
If a landlord has already obtained an eviction order, a bankrupt tenant who wants to keep the lease may only have 30 days to be completely caught up with payments, or may be out of luck, depending on the state.
If bankruptcy precedes the eviction process, a tenant who wishes to keep the lease must have a repayment plan and make timely payments in the future.
“The higher the amount owed, the harder it is to enter into these kinds of plans,” Rao said.
Despite its shortcomings, bankruptcy could be an attractive option for tenants with large debts that accumulated during the pandemic.
Chapter 7 in particular may appeal to troubled tenants who are willing to quickly give up their leases instead of developing repayment plans, as it allows for simple debt payment without a repayment proposal.
“You have this confluence of events that just might lead to bankruptcy court at some point,” Fleischman said.
The national moratorium on evictions from the Centers for Disease Control, put in place last September to prevent the spread of Covid-19, is expected to expire at the end of the month.
A federal court ruled in May that the moratorium exceeded the authority of the CDC, but the decision was prevented from coming into effect.
With the decline in Covid-19 cases, the days of the moratorium are numbered regardless of the court ruling.
About 14% of all renters in the United States are currently behind on monthly payments, up from 19% in January, according to National Equity Atlas, a partnership between nonprofit research organization PolicyLink and the Equity Research Institute. from the University of Southern California. People of color, who have been disproportionately affected by the pandemic, account for 64% of those behind in rent, data shows.
Despite the drop, rental default rates are double what they were in 2017, according to data from the US Census Bureau. National Equity Atlas calculates that 54% of delinquent tenants are unemployed. And 68% of those tenants lost income during the pandemic, which contributed to rising levels of housing insecurity.
American households behind on rent owe $ 3,200 on average, and half are three months or more late, the organization said.
“Because the moratoriums have been going on for so long, people are way behind,” said Edward Boltz, consumer bankruptcy lawyer at the law firm of John T. Orcutt.
The federal government has earmarked more than $ 46 billion in rent assistance to avert an eviction crisis that could result from the end of the moratorium.
“There is enough money to cover the rent deficit by all estimates I’ve seen,” said Eric Dunn, director of litigation at the National Housing Law Project.
But those funds cannot prevent an increase in bankruptcy filings for people who have accumulated debt in other areas in order to stay on top of rent payments, he said.
“I have no doubts that the landlords are going to be healed” with federal rent assistance, Dunn said. “I am less convinced that this will not leave people insolvent.”