An unprecedented amount of unpaid rent is making bankruptcy a more attractive option for millions of Americans grappling with paying their landlords as Covid-19 relief measures come to an end.
Renters generally can’t use bankruptcy to avoid eviction unless they can work out a plan to pay back accrued rent. But for tenants prepared to relinquish their leases, the process can slow an eviction and allow them to get out of paying built-up rent debt. And this feature is expected to grab more tenants’ attention as the federal government’s eviction moratorium is set to expire June 30.
Nearly 7 million Americans reported being behind on rent as of late April, according to the U.S. Treasury Department. Some 5 million more renters lacked confidence they could cover upcoming payments.
“Up until the pandemic, past due rent has not really been one of the reasons for people going into bankruptcy,” said consumer bankruptcy attorney Jay Fleischman of Shaev & Fleischman PC. “With so many people past due on their rent, I expect a sea change.”
People don’t typically file bankruptcy to address just a single debt like past due rent, or to delay eviction proceedings. The process doesn’t automatically overturn a landlord’s right to remove delinquent tenants.
More often, it’s used as a last resort for homeowners facing foreclosure or people overwhelmed by a host of different debts.
But the eviction protections established last year at both the federal and state level have helped create a “unique situation” for people who owe more than they can repay and who are able to move, said John Rao, an attorney at the National Consumer Law Center.
“It’s certainly anticipated that filings will increase once those moratoria are no longer in place,” Judge Kathy A. Surratt-States of the U.S. Bankruptcy Court for the Eastern District of Missouri said at a virtual conference last month.
Bankruptcy should give delinquent renters the breathing room to move out on their own terms and possibly discharge the debt that has built up, she said.
Renters who want to keep a residential lease through bankruptcy typically would file Chapter 13 to come up with a multi-year plan that repays past debts over time. But avoiding eviction through bankruptcy can be difficult, attorneys say.
If a landlord already secured an eviction order, a bankrupt tenant who wishes to keep the lease may have only 30 days to get completely caught up on payments, or may be out of luck entirely, depending on the state.
If the bankruptcy precedes the eviction process, a tenant who wishes to keep the lease must have a repayment plan and make timely payments going forward.
“The larger the amount that’s owed, the harder it is to enter into those types of plans,” Rao said.
Despite its shortcomings, bankruptcy could be an attractive option for renters with significant debts that piled up during the pandemic.
Chapter 7 in particular may appeal to struggling renters willing to quickly let go of their leases instead of working out repayment plans, because it allows for a straightforward discharge of debts without a proposal for paying them back.
“You’ve got this confluence of events that may well lead to the bankruptcy court at some point,” Fleischman said.
The Centers for Disease Control’s national eviction moratorium, put in place last September to prevent the further spread of Covid-19, is set to expire at the end of the month.
With Covid-19 cases declining, the moratorium’s days are numbered regardless of how the courts rule.
Approximately 14% of all renters in the U.S. currently are behind on monthly payments, down from a high of 19% recorded in January, according to National Equity Atlas, a partnership between nonprofit research organization PolicyLink and the University of Southern California’s Equity Research Institute. People of color, who have been disproportionately impacted by the pandemic, make up 64% of those behind on rent, according to the data.
Despite the decline, rent delinquency rates are double what they were in 2017, U.S. Census Bureau data show. National Equity Atlas calculates that 54% of delinquent renters are unemployed. And 68% of such renters have lost income during the pandemic, contributing to heightened levels of housing insecurity.
U.S. households behind on rent owe $3,200 on average, and half are behind by three months or more, the organization said.
“Because the moratoria have been going on for so long, people are far behind,” said Edward Boltz, a consumer bankruptcy attorney at the Law Offices of John T. Orcutt.
The federal government has appropriated more than $46 billion for rental assistance to avoid an eviction crisis that could result from the end of the moratorium.
“There’s enough money to cover the rent shortfall according to every estimate I’ve seen,” said Eric Dunn, director of litigation at the National Housing Law Project.
But those funds may not forestall an increase in bankruptcy filings for those individuals who accrued debts in other areas in order to stay on top of rent payments, he said.
“I’m confident landlords are going to be made whole” with the federal rental assistance, Dunn said. “I’m less confident this won’t leave people insolvent.”