The Short Answer
No — once you decide to surrender a rental property in bankruptcy, you should stop collecting rent. When you surrender a property, you're giving up your rights and interests in it, which includes the right to collect rental income. The bankruptcy Trustee treats any rent you collect as unprotected funds that must be turned over to creditors. We tell our clients to direct tenants to pay rent to the Trustee directly, or to simply stop paying if they plan to leave the property.
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 the extra properties and the mortgages that come along with those properties. When you surrender a rental property in bankruptcy, you are in essence surrendering your interests and rights to the property. Therefore, you are not eligible to collect rent while in bankruptcy.
Additionally, the bankruptcy Trustee sees 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.
Once you have been discharged of your debts and have received a final decree that officially closes your case, you may begin to receive rental income. However, approach this scenario with caution. Even though you have completed your bankruptcy the Trustee has the ability to reopen your case and require you to pay him all the funds you had received after your discharge. So, you definitely need to weigh your pros and cons. If this situation sits in your future horizon, you should discuss this with your bankruptcy attorney prior to your discharge. Moreover, if the tenants are aware of the circumstances, they may not even be willing to pay rent while still living in the home. Since the property is still in your name until the bank forecloses, you may engage in the eviction process. Or you could insist on the tenants paying enough to cover homeowners insurance or property taxes. If there is a homeowners’ association linked to the home, whoever lives in the property should stay current with the HOA.
We typically tell our clients to stop collecting rent when they decide to file for bankruptcy. Instead, the tenants should pay rent to the bankruptcy Trustee or stop paying rent all together if they no longer wish to stay in the house. This ensures the bankruptcy client is not doing anything to jeopardize the success of their bankruptcy.
Key Takeaways
- Surrendering a rental property in bankruptcy means giving up your right to collect rent from that property during the case.
- The bankruptcy Trustee will treat any rent you collect as unprotected funds and require you to turn those funds over to creditors.
- Tenants are notified when a property enters bankruptcy and may already know they are not obligated to pay rent to you — and some may report you if you try to collect.
- We advise clients to direct tenants to pay rent to the Trustee or stop paying altogether, which protects the client from jeopardizing their case.
- Even after your discharge, the Trustee can reopen your case if you collected rent during a gray-area period, so timing matters and you should discuss this with your attorney before discharge.
- Since the property stays in your name until the bank forecloses, you can still pursue eviction or ask tenants to cover costs like homeowners insurance, property taxes, or HOA dues.
Attorney Insight
The mistake I see most often is a client who keeps collecting rent for a month or two after filing because they assume the property is still theirs to manage — technically it is, but the income is not. The Trustees here are experienced and they look for rental income that wasn't disclosed or turned over, and that can put your entire discharge at risk. I always tell clients upfront: the day you decide to surrender that property is the day you stop accepting rent checks. Getting this wrong at the start of your case is far more costly than the lost income ever would have been.
