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Bankruptcy

: Arizona Bankruptcy Attorney Blog

What's Going to Happen to my Tenants When I File My Chapter 7 Bankruptcy?

By Joseph McDaniel, Esq.

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A lot of my clients are high-end, super duper bankruptcy cases, like doctors, lawyers and CPAs. And a lot are ordinary Joes and Janes.

As I've mentioned in a prior post, mature adults seem to be an increasing segment of the bankruptcy filing population, because if they're trying to support one generation up, and two or three down, they don't have a lot of spare money. Really.

But a lot of my clients, regardless of their ages, have extra homes they bought during the real estate bubble expansion, because that seemed like a good idea at the time.

And because I have the best bankruptcy clients in Arizona (not kidding), and they are one and all decent, caring people, they worry about their renters. Because they don't want to hurt anybody, if they can help it.

So they ask me, "What about the people renting my bad investment houses?"

And I tell them, "You don't have to worry about your renters. There's a statute specifically designed to provide relief to renters who get caught in the trustee's sale explosion."

I'll talk about it more in future posts; and my buddy, Peter Strojnik, litigates some matters of this sort.

But here's the statute, for your reading pleasure, and as always, if the law changes, or this isn't an accurate version of the statute, or a newer version of the statute exists, well, check multiple sources, and don't rely on this for anything at all, right?

SEC. 702. Effect of foreclosure on preexisting tenancy.

(a) In general.?In the case of any foreclosure on a federally-related mortgage loan or on any dwelling or residential real property after the date of enactment of this title, any immediate successor in interest in such property pursuant to the foreclosure shall assume such interest subject to?

(1) the provision, by such successor in interest of a notice to vacate to any bona fide tenant at least 90 days before the effective date of such notice; and

(2) the rights of any bona fide tenant, as of the date of such notice of foreclosure?

(A) under any bona fide lease entered into before the notice of foreclosure to occupy the premises until the end of the remaining term of the lease, except that a successor in interest may terminate a lease effective on the date of sale of the unit to a purchaser who will occupy the unit as a primary residence, subject to the receipt by the tenant of the 90 day notice under paragraph (1); or

(B) without a lease or with a lease terminable at will under State law, subject to the receipt by the tenant of the 90 day notice under subsection (1),

except that nothing under this section shall affect the requirements for termination of any Federal- or State-subsidized tenancy or of any State or local law that provides longer time periods or other additional protections for tenants.

(b) Bona fide lease or tenancy.?For purposes of this section, a lease or tenancy shall be considered bona fide only if?

(1) the mortgagor or the child, spouse, or parent of the mortgagor under the contract is not the tenant;

(2) the lease or tenancy was the result of an arms-length transaction; and

(3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit?s rent is reduced or subsidized due to a Federal, State, or local subsidy.

(c) Definition.?For purposes of this section, the term ?federally-related mortgage loan? has the same meaning as in section 3 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2602).

This thing is somewhat easier to read than some legislation, but I'll walk you through it when I get a Round Tuit.

But as you can see, in some cases, the bank that ran the foreclosure is forced to honor the term and conditions of the lease that was in place on the date of the foreclosure.

If you're a renter, that's better than a sharp stick in the eye, you know?

Full post as published by Arizona Bankruptcy Attorney Blog on September 23, 2010 (boomark / email).