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I’m a Creditor: The Other Side of Bankruptcy

After college, my husband and I bought a house in a normal middle-class neighborhood. Two years later, we decided we wanted to move out of the city, and instead of selling the house, we decided to rent it out.

We did a lot of math and research, and decided we could both trade up the house we were living in and support a rental, even if the rental wound up vacant for an extended period of time. We didn’t feel like we knew everything, but we were comfortable getting started. We signed up with a landlord service to check credit and background, and then took in our first tenant.

We made a number of mistakes the first couple of years. We were young and expected people to be honest. I believed that, on the whole, people want to do the right thing. I still think that’s true, but watching the mental gymnastics some people go through, I now believe they have an endless capacity for making “the right thing” happen to be whatever is best for them.

Every tenant has done something that’s cost me money:

  • Left major damage (stepped in the sprinkler box breaking every pipe).
  • Taken off without notice (legally you still have to go through eviction if they didn’t give notice).
  • Acquired pets that weren’t in their lease and caused damage (you have to decide: is it worth evicting over a dog?)
  • Taken things from the property that weren’t theirs to take.

But that’s the name of the game. I wasn’t shocked to be left holding the bag on more than one occasion. It’s business. But this isn’t a story about land lording—it’s a story about bankruptcy.

Peter and Tara
In the summer and fall of 2008, the rental market started getting soft. I had a tenant leave without notice at the end of summer, and we couldn’t find a renter. We found a family who wanted the house, but they didn’t have good credit.

In hindsight, we shouldn’t have rented to them. Their credit was bad. There were red flags. But there are red flags with most people; renters rarely have clean records or most of them wouldn’t be renters. No renter is perfect. Their references were very good, and they had supposedly never missed a rent payment. They claimed to be in the middle of bankruptcy caused by a business venture that had gone south. I knew the law that post-bankruptcy they would be on the hook for years until they could file again. We took a calculated risk because we thought the worst that was likely to happen was that they wouldn’t pay their rent and we’d have to evict them and support a house payment for up to two months.

Aside: Though I may seem harsh here at GRS, I’m actually a bit of a soft touch. In my short tenure as a landlord, I’ve extended rent payments for a variety of reasons. I also know I can’t squeeze money out of someone who is broke, and if they can’t pay I’ve offered to break a lease if they’ll nicely and quickly move to somewhere more affordable. But ultimately it is not my responsibility to house people; it’s my responsibility to house my family, and to protect my interests. Sometimes people need help. I know a number of people who have declared bankruptcy: My aunt, my mother in law, a cousin, a couple close friends. Therefore, I’m aware of the human side of bankruptcy.

Peter and Tara moved in with their kids (and undisclosed dogs) in September. As we were signing the lease, they explained that they only had about one-third of the deposit, but they were waiting to get their deposit back from their previous place. Though this raised a flag, we agreed they could pay it with the next month’s rent.

For each of the first couple months, they paid a couple of days late each time. They never made up the deposit, though each time it was promised next time, I understood that work was slow. Peter worked in low-level construction (landscape, re-stucco, that kind of stuff), and as it was getting to be late fall we let it slide.

In December, they didn’t pay. We got a story that his work for the month had been financed through a larger plumbing company and they hadn’t paid him yet. My husband and I decided we weren’t likely to find renters the week before Christmas, and we didn’t want to stress out the family with kids at the holiday, so we were going to give them until the last week of December to pay. They paid off December’s rent on the 24th. They dragged out January, finally paying 75 percent of it on the 28th. In my experience, once someone is a month behind they won’t make it back, and it’s actually kinder to cut them off than let them keep sinking: When they weren’t able to come up with the balance for January, we filed for eviction on the 8th of February.

We got a court hearing for February 27. The judge nicely heard our argument and asked Peter if he disputed it. He didn’t. The judge asked Peter if he had anything to add, and Peter said, “Yes. I filed for bankruptcy on the 11th.” (That was the day he was served with eviction papers.) With that, the judge looked at us and said there was nothing he could do. The next step for us was to go to the federal bankruptcy court down the block to attend the creditor meeting on the paperwork Peter provided.

Behind the Scenes with Bankruptcy
For those of you unfamiliar with bankruptcy, let me provide some basics. When someone files bankruptcy, they get what is called an Automatic Stay. This means they have protection against collection of any debts accrued before the date of file, and includes any repossession or eviction proceedings. Peter and Tara had been living in our house rent-free for six weeks, and not only could we not collect the money, we couldn’t get our house back. But if Peter had turned to us and said, “By the way the toilet is leaking”, we’d have a legal obligation to go fix the toilet and couldn’t even ask when they were going to pay the rent. Had we done so, it would have been considered harassment, and we’d have been in violation of federal bankruptcy code and then they could have sued us. Not likely, but possible.

Here’s the general schedule of a bankruptcy:

  • After a bankruptcy is filed, there’s also a meeting of creditors. This is set at least thirty days out from date-of-file to allow the debtor time to collect and submit their paperwork.
  • After that, there’s a period where creditors can dispute the claims.
  • And after that, the bankruptcy is typically discharged and the process is at a conclusion seven to ten weeks after date of file.
  • Also, bankruptcy is in federal court while eviction is in county court. These courts don’t talk to each other; they don’t share information. They’re physically separated and are both “court” like an elementary and university are both “schools”.

When bankruptcy is filed, the stay is for old debt, but since Peter and Tara were in the house, they still needed to pay current rent. So, a few days after March 1, when they were late on currently due rent, I sent them a late notice, and when they didn’t pay I petitioned the court for a rehearing.

In the meantime, we attended the creditor meeting on March 11. When we showed up, there was no one there for Peter and Tara’s bankruptcy—not even Peter and Tara. The lady who was running the hearings said that no paperwork had been submitted beyond the original filing. Furthermore, Peter and Tara were not eligible for bankruptcy. They still had five months to go before their last bankruptcy was old enough to allow for a new filing. It looked like they had filed for bankruptcy so they could intentionally steal rent from us. They spent $450 to file bankruptcy in order to stay in my house for free until it was dismissed (at least six weeks). The federal government had found nearly a dozen things wrong with Peter and Tara’s bankruptcy filing, so the court was moving to dismiss. The information was staggering, but we were happy because we could now get our house back.

We went to the scheduled eviction hearing on March 29. I read the bankruptcy law itself, which I interpreted to say that the automatic stay that barred us from evicting Peter and Tara was only for debt incurred before date of filing.

I told the judge: “Yes, Your Honor, there is nothing to the bankruptcy. The federal government is dismissing the filing. Plus, we have the documentation that they are late on their current rent and can be evicted for that alone.”

The judge replied: “I am not a bankruptcy judge, and I don’t have the documentation. Go back to the federal court and bring me the papers.”

So, we drove a mile-and-a-half down the road to the federal courthouse. They didn’t have any record of a bankruptcy dismissal. We should come back later. At this point, we called a bankruptcy attorney. He answered a few questions for free and said he would file for a “Release of Stay” (removing us from the order of inaction) for $400.

At each point in this process, we learned more.

We didn’t know we could file for a Release of Stay, or we would have as soon as Peter and Tara’s rent was late in March. We asked the attorney about the dismissal, and he said he would call the courthouse to check on it. He called us back the next day. The movement for dismissal had been sitting on someone’s desk for a couple of weeks (since well before our eviction hearing). He was able to talk to the right person and get it stamped and put in the computer in ten minutes. We could now evict.

With copies of the paperwork in hand, we once again petitioned to have our eviction reheard. We finally got on the docket for the end of April.
The judge heard our case and ordered Peter and Tara out of the house. He gave them three days, the minimum allowed by law.

Three days passed—and they were still in the house.

At this point, Peter and Tara were in violation of the court order, but there was nothing we could do ourselves. We had to go back to the courthouse and file to “induce a Writ of Eviction”. In other words, we needed further court documentation that we were allowed to call the Sheriff for removal.

The clerks were horrified that we were kicking people out of their home. I think after the judge tells people to leave, most people actually do. But they were underestimating our tenants! With scandalized looks and a couple sidelong glances, the clerks did the paperwork and handed it back. Then the Writ of Eviction was taken across town again to be filed with the County Sheriff for a physical removal.

The Law Wins?
On May 14, we met the Sheriff at the house to find the tenants finally packing to move. The law said we had to give them a full workday to get their stuff moved. We agreed that May 14 was it, changed the locks, and asked the deputy to look around (in case they did malicious damage).

After the deputy left, Tara chewed me out for embarrassing her and said, because of it, she wouldn’t pay the water bill. When I informed her that after not having paid rent in four months, I didn’t exactly expect her to pay the water bill, her response was, “Peter didn’t pay the rent, not me.” Uh … what? This goes back to the mental gymnastics people go through to determine “the right thing”: She had been living in my house without paying rent since mid January, but since paying rent was her husband’s responsibility, she was entitled to righteous indignation (and now she could take the high road and not pay for half a year worth of water! How fortunate for her).

We returned to the house to find it unlocked, the garage door open, trash stacked six feet high in the garage, and everything of value we’d left for the house (paint, tools, replacement fixtures) gone.

Not surprised, we called the police, who said that since the door was left open, we had no way to prove who took our things. Therefore, they wouldn’t even call Peter and Tara to ask if they knew what happened to our stuff. (Yes, I know leaving stuff there was stupid, which I told my husband well before this. He finally learned his lesson, and now keeps things for the rental in our garage).

Four months, six days off work, $6000 in rent, $850 in water, $150 in court costs, two trips to the dump, a week of cleaning, and $300 of stolen stuff later, we finally had our house back. It took thirteen trips to a courthouse (either county or federal), which wound up costing us about a half day of vacation every ten days.

We turned the house over to a rental management company because we decided they earn their keep with one eviction. My husband chose one with a lot of units that we saw at court every time we were there. With jobs, a kid, and my husband in school, it wasn’t possible to be as responsive as we needed to be. And the time commitment of a bad eviction like this one is severely draining when you have other responsibilities.

Creditors Have a Face
I didn’t write this story to whine and complain. I know this is part of doing business. Peter and Tara weren’t stealing from me because they didn’t like me; they simply saw themselves as victims of the world, and they were taking from someone they saw as able to afford it—their own little story of Robin Hood. They had the need, and we had the means.

When people speak of bankruptcy, they usually speak of the debtor in human terms and the creditors in faceless terms. I have heard people essentially say “The debtors are just trying to get by and the creditors are mean [somehow forcing credit on people] and/or should know better [because they allowed people with bad credit to owe them money].”

But I am a creditor, and I’m just trying to get by and make a good life for myself and my family. By not paying their rent or allowing me to find new tenants, Peter and Tara forced us to cover all our expenses out of pocket. This had real and serious consequences for my family. (How many of you could afford $5000 in mortgage payments plus cleaning/repairs without feeling some pain?)

I grew up below the poverty line with divorced parents. My husband grew up in a trailer park. His father was (and likely still is) a drug abuser and dealer. We aren’t heirs to a fortune, and we certainly aren’t Chase or Citibank. We put ourselves through college for a better life than our families. We work really hard to get ahead. We live financially prudent lives. But I know other landlords who weren’t as prudent. They didn’t have a big enough emergency fund, and they were ruined by a large expense such as ours. In those cases, bankruptcy frequently begets bankruptcy.

When a dentist builds a crown, he is likely a creditor. When a propane tank is filled, the company is a creditor. When a house has any kind of upgrade or large repair, credit is usually at least partially involved. Just about anyone can be a creditor.

Part of the most recent bankruptcy reform bill is to weed out repeat filers and other people who abuse the system. Before reform, there was nothing to keep Peter and Tara from refiling as soon as their case was dismissed. Now there’s a mechanism in place to look at refilers more closely if they file twice within a year. Either way, it still bugs me that it took so long for such a blatantly bad filing to be dismissed. The fact that they weren’t eligible due to a previous bankruptcy should have meant that the court wouldn’t even let them file in the first place. That’s a big part of my problem with bankruptcy—not the people that file, but how easy it is to abuse once you understand the system. After an experience like this, I’m disillusioned.

Bankruptcy has a place, but please remember that creditors have a face too.

Originally published on GetRichSlowly