Evicting a non-paying tenant.
Question 1
I began an eviction against a non-paying tenant, but he left prior to my obtaining a judgment. I’m trying to decide whether or not to continue the process to completion when I think the financial condition of the tenant might make him judgment proof. Can you provide some guidance?
Answer 1
Most often the term “judgment proof” is used to describe individuals thought to have no assets. Taken literally, you would not want to waste your time to even file suit against such individuals. Any judgment awarded would likely be difficult if not impossible to collect.
Filing a lawsuit and winning a judgment does no good if the tenant is truly judgment-proof. However, an important consideration is whether the landlord thinks the tenant will stay judgment-proof for the long term. Although it varies among states, judgments are typically good for 5 to 10 years and can be renewed for additional periods, so the chance of collecting a judgment at a future date may be worth the expense of filing the lawsuit today. The debtor may get a good job, marry
money, inherit money, or win the lottery during the years ahead. Furthermore, you are entitled to interest on the unpaid judgment, usually at a far higher rate than you can get investing elsewhere, particularly with current low bank
interest rates. Even the ongoing costs of collecting the judgment may eventually be recoverable.
Whether you ever get the money depends in large part on the defendant’s ability to pay and on the landlord’s ingenuity and perseverance. No law forces a person to pay a judgment. The Court will not collect the money for you. Instead, the laws provide procedures to attempt to ‘execute’ on a judgment. If the defendant really cannot afford to pay the judgment even these procedures will prove useless, at least at the current time.
Once you have a money judgment, common sense does come into play when deciding when and how hard to pursue collection. There are some debtors who will likely never have enough assets to satisfy a judgment, even relatively small judgments. Accordingly, landlords must consider available information, both that related to the original application and recent events, and investigate further regarding the tenant’s financial condition.
Landlords usually have the right to regularly obtain credit reports for tenants and ex-tenants against whom they have judgments. Credit reports provide useful information regarding the debtor.
If your investigations determine that your debtor is dependent upon social security or disability payments, has other judgments against him, is serving a lengthy prison sentence, has IRS liens, or is permanently living in a foreign country, you have a decision to make. Living in another state does not prohibit collection of a judgment, although it can require a bit more effort and expense for collection.
If your decision is to defer collection until a later time, it is important to regularly monitor your debtor’s physical location and financial condition to determine future collection efforts.
A significant benefit of having a judgment is that you may be pleasantly surprised when you are contacted regarding settlement of the judgment because a lender or other landlords demands that your judgment be settled as a condition of making a loan or renting a unit to the debtor.
It is also possible that the judge can order the debtor at a “show cause” hearing to prove to the court that the debtor cannot pay the judgment as ordered. However, the court may grant the debtor an extension of time to pay the judgment. The
extension is only a temporary stay and not a declaration of a permanent status of inability to pay the judgment as ordered.
For significantly more information regarding judgment collection see our eCourse titled “Collecting Judgments” and/or our Mini Training Guide titled “9 Steps to Collecting a Judgment.”
* * * * * *
Question 2
When one does significant work on fixing up a rental that includes both items that are usually deductible as an expense and those that should usually be depreciated, how do I determine how to categorize the various tasks?
Answer 2
When you repair a broken or damaged item or replace a minor component of a capital item you can deduct the cost on your tax return for the tax year in which the amount was paid or liability for payment was incurred – e.g., charged to your
credit card.
When you purchase capital items for your property (e.g., a new air conditioner), replace a major component of a capital item (e.g., a new compressor for an air conditioner), or make improvements (e.g., install new tile flooring) the amount
must be capitalized – i.e., a portion is deducted each year over the recovery period as specified by the IRS.
However, the IRS requires that you capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan. This applies even if some of the work would by itself usually be classified as repairs. For
example, for the rehab of a unit that includes new carpeting, painting of the interior, new window coverings, and replacement of the kitchen faucet, the cost of the entire project should be classified as a capital improvement even though
replacement of a faucet and often even the painting would usually be classified as a deductible expense when done alone.
* * * * * *
Question 3
I recently had a problem regarding a tenant of my rental condo who refused to pay the penalty fee for failing to obey one of the rules & regulation of the association, claiming he was never made aware that the infraction issue was a violation. Other than mentioning the issues at the time of lease signing, how can I best avoid such problems in the future?
Answer 3
Rental of housing that is governed by an association can be significantly affected by HOA rules and many landlords of such property are themselves unaware of some of the issues. It is even possible that an owner cannot rent a property within the community. It is important that owners and tenants obey the rules and regulations of an association. Failure to do so can result in fines and even in liens being filed against the property. In many states the property can even be foreclosed on if the owner fails to pay such assessments.
Therefore, it is important that prospective tenants be provided information about at least the most important issues covered by association by-laws and rules & regulations even prior to submitting an application because there might be issues that would discourage a prospect from completing an application. Finding out at lease signing that association issues are unacceptable to the tenant would be a waste of time and money for the applicant and the landlord and result in additional vacancy time for the unit.
Ideally, copies of the relevant documentation will be provided along with application forms and it is a good idea to include a statement on the application that the applicant is aware of the association bylaws and rules and regulations.
It is even better to include clauses regarding owner association issues within the lease agreement so that there can be no question that the tenant knew of the issues and agreed to abide by conditions.