As a self-storage operator, it is important that you take all necessary steps to protect your business from liability. This is especially true if you learn that one of your tenants has filed for bankruptcy. You need to make sure that you are not breaking bankruptcy law, so that you can collect the money owed to you. Here are some basics you need to know and the steps to follow.
The Basics of Bankruptcy
Individuals and business owners are likely to file for Chapter 7 or Chapter 11 bankruptcy, which primarily concerns business enterprises. When a Chapter 7 is filed, the court appoints a trustee, who liquidates all of the debtor’s available assets so that creditors can be paid. In the case of a Chapter 11, the debtor retains ownership of their business and can keep the business open. The goal here is to pay creditors more than they would receive if the assets were liquidated. If the business still fails to prosper, Chapter 11 can be converted to Chapter 7.
There are different types of bankruptcy claims, including pre and post petition. Pre-petition claims are obligations your self-storage tenant incurs before filing for bankruptcy. Any self-storage rent that was due before the deposit is an “unsecured” debt. This is the last category of receivables to receive payment. Even if paid, it will almost certainly be at a significant discount.
Post-petition claims are those made after the filing of the bankruptcy petition. If your self-storage tenant continues to occupy the premises after his deposit, the rent for this period is an “administrative” debt. Your tenant to have to pay those claims before paying anything else, regardless of the type of bankruptcy they filed. If there is not enough money to pay all administrative debts, then all available money will be shared proportionally among creditors.
Perhaps the most important thing you need to know as a self-storage operator is that when a tenant declares bankruptcy, all collection efforts should be halted. This includes unauthorized evictions or other methods of collecting money. An “automatic stay” is triggered, which prevents creditors from taking action against the debtor without the latter’s consent.
Steps to follow
Below are some steps to take when you know your self-storage tenant has filed for bankruptcy. You will find ways to reclaim what is owed to you and make the space available for rent again.
1. Stop the sale. Once you discover that a tenant has filed for bankruptcy, end all action against them, including a sale of lien. You can’t even send notices of default or impose additional charges accrued up to the date of filing. The automatic suspension is in effect and you cannot continue.
2. Contact the trustee in bankruptcy or the debtor’s lawyer. You will find their information on the bankruptcy petition. The interest of this first contact is to know the intention of your tenant. They can choose to leave the self-storage unit or stay. If they want to move, you will not be able to request payment. Instead, you will need to file a proof of claim for rent owed if there are assets for which rent may be charged.
Your tenant can ask the bankruptcy court to let him assume the current contract called enforceable contract. If approved, they will have to pay rent while the lawsuit is in progress, and they will also have to pay any outstanding fees to get out of default. The self-storage operator has priority in this case. However, the trustee will reject the agreement if he does not believe that storing the assets will be in the interest of the debtor.
3. Dealing with the courts. If your self-storage tenant refuses to leave your property and does not pay their debt, you will have to go to court. One of three things can happen:
- Release of stay: As a creditor, you can file a “stay waiver request”. If the judge approves it, he allows you to enforce your lien rights and seize the tenant’s property.
- Turnover: In some cases, you may receive a rotational petition, ordering you to turn over the tenant’s stored property to the trustee in bankruptcy. This allows the court to amass the debtor’s assets and distribute them among all the creditors.
- Abandonment: You can submit a Petition to the bankruptcy court for the trustee to abandon the tenant’s property. If you do, it should show the court that the property is a burden on the debtor and has no value or benefit to him. If the trustee in bankruptcy is required or decides to give up the assets, those assets can be turned over to your self-storage facility, and you can then sell them to recover the money owed. Abandonment allows you to remove the tenant’s ownership of the unit, making the space available for rental and allowing you to earn income again.
Finding out that one of your self-storage tenants has filed for bankruptcy can be stressful. The process can be long and laden with complex rules. It is essential to understand your rights as a creditor in order to protect your business.
Lyle Solomon is lead counsel for Oak View Legal Group in California. He has been a member of the California State Bar since 2003 and has extensive legal experience and consumer credit knowledge. He graduated from McGeorge Law School at the University of the Pacific in Sacramento, California in 1998. To reach him, call 800.530.6854.