The Short Answer
No — if you are surrendering a rental property in bankruptcy, you cannot legally keep collecting rent from the tenants. When you surrender the property, you are giving up your rights to it, which includes the right to collect rental income. Any rent collected becomes an unprotected asset that the bankruptcy trustee can claim for your creditors. This rule applies both during the bankruptcy case and after it closes — surrendering the property ends your right to that income permanently.
Rental properties can be a great source of income until a renter moves without notice or fails to pay or that rental income starts to be used for your personal household expenses. As situations arise, many people are finding it necessary to file bankruptcy and surrender a rental property or properties they own. When you surrender a rental property in bankruptcy, you are in essence surrendering your interests and rights to the property. Therefore, you are not allowed to continue to collect rent while in bankruptcy since you are no longer obligated to pay the mortgage payment (and likely are not continuing to pay the mortgage payment).
Additionally, the bankruptcy Trustee will see this as unprotected funds and will request the received funds to go to the creditors. Furthermore, tenants are always informed if a house is being surrendered in bankruptcy. Your tenants may be well aware of their rights and have the responsibility to report a debtor who tries to collect rental income while in bankruptcy.
We encourage our clients to do one of two different things. One option is, the Debtors in the bankruptcy need to notify their tenant of the forthcoming bankruptcy and tell the tenant they will no longer be collecting rent and tell the tenant they should hold on to the money they would paying in rent and pay that money to the bankruptcy Trustee if they wish to continue to stay in the house. Another alternative would be to collect the rent money and put it in a new bank account and hold it in that account for the bankruptcy Trustee. It is important that you do not “commingle” collected rent with other bank accounts and it is important you do not start using the rent money for living expenses. Usually the easiest and most efficient way to handle a rental property is to notify the tenant and let them know they need to hang on to that money to pay it to the bankruptcy Trustee.
After your bankruptcy case has been discharged you have received a Final Decree that officially closes your case, you still should not collect rental income if you surrendered the property in your bankruptcy.
Key Takeaways
- Surrendering a rental property in bankruptcy means giving up your legal right to collect rent from that property immediately.
- The bankruptcy trustee will treat any rent you collect as unprotected funds and can require those dollars go to your creditors instead of you.
- Tenants have the right — and in some cases the responsibility — to report a debtor who continues collecting rent on a surrendered property.
- One practical option is to notify your tenant of the bankruptcy and instruct them to hold the rent money and pay it directly to the bankruptcy trustee if they wish to stay.
- If you do collect rent payments before transferring them to the trustee, keep that money in a separate, dedicated account — never mix it with your personal funds or use it for living expenses.
- Even after your bankruptcy case is fully discharged and closed, you may not resume collecting rent on a property you surrendered.
Attorney Insight
The mistake I see most often with rental property clients is that they assume collecting rent is fine as long as they plan to hand the money over eventually — but "eventually" isn't good enough for the trustee. The trustees here routinely flag undisclosed or commingled rental income, and if that money has already been spent on groceries or utilities, you've now created a potential problem with your discharge. My strong advice: the moment you decide to surrender a rental property, notify the tenant in writing and take yourself completely out of the rent collection picture. The cleaner the separation, the smoother the case.
