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.