Should I rent to an applicant who has filed chapter 7, 9 or 13?
Question 1
Should I rent to an applicant who has good credit (Credit Score: 790) and appears to pay his bills as agreed, but has filed 9 Chapter 7s and a Chapter 13?
Answer 1
Without additional details regarding all information you might have regarding the filings, I can only discuss some general issues related to applicants who have filed for bankruptcy.
Most importantly, landlords have the right to set specific tenant selection criteria which has a business purpose and this can include a bankruptcy filing as a reason for rejection of the application as long as the landlord has a policy that says someone who has been involved in a bankruptcy is not acceptable. The policy should be written and should state what bankruptcy issue is considered unacceptable – e.g., which Chapter(s) and whether it matters if an applicant has simply filed or the bankruptcy was completed.
Federal fair housing laws do not include a protected class for financial condition or past financial history. If the landlord’s criterion is rejection of every applicant who has filed for bankruptcy and the criterion is applied to every applicant without discrimination, the rejection of the application is a legitimate business decision by the landlord.
While recognizing that bankruptcy is a legal right allowing relief from certain debts, a landlord wants a tenant who has a satisfactory history of credit management. Specifically, the landlord wants a tenant who has the ability and willingness to pay rent. A bankruptcy filing indicates the applicant was, apparently thought he was, or wanted creditors to think that he was unable to meet his financial obligations during a certain period. The underlying event necessitating bankruptcy may have compromised the applicant’s ability to meet future financial obligations. The landlord may not want to take a chance.
However, some landlords set financial criterion that allows some flexibility in evaluating bankruptcy filings. The reason why the applicant filed and/or completed bankruptcy can be most important. Sometimes circumstances beyond control force one to choose bankruptcy. Examples include serious medical problems or a divorce. Landlords may give greater importance to the applicant’s credit management history since the bankruptcy filing. For example, a bankruptcy filing will stay on the applicant’s credit record for seven to ten years, depending on the Chapter filed under. If the applicant is nearing the end of that record period and the bankruptcy has been fully discharged, the landlord, while still taking the bankruptcy into account, may focus on the most recent year period of credit history (for instance, the last three or four years.) The landlord may also elect to offer tenancy based on acceptance of conditions such as a co-signer or guarantor, a higher security deposit (as allowable by state statute), or a shorter-term lease. The landlord is still bound by fair housing laws and cannot discriminate by selectively offering different terms to different classes of applicants that are protected
under federal, state, or local fair housing laws.
There is another consideration in that, assuming he/she has adequate income, the applicant should be more credit worthy after a bankruptcy than before. First, discharged old debts will no longer have a claim on future income and rearranged payment plans can solve cash flow problems. Second, bankruptcy cannot be filed again for a number of years.
For applicants who have fully completed a bankruptcy, a landlord must consider under which Chapter of the Bankruptcy Code the bankruptcy was done.
Furthermore, one must realize that not having filed bankruptcy doesn’t always mean much, as anyone who has never filed for bankruptcy could file at any time because (1) even though there is nothing to indicate a problem in their record, as there are debts that don’t appear in the credit record or (2) soon after they move in unexpected medical expenses quickly drive them into bankruptcy. A landlord cannot file a lawsuit for collection or eviction once the bankruptcy filing has
occurred without permission of the Bankruptcy Court.
While a landlord might theoretically collect some of any unpaid rent from before the filing, my experience has been that it is likely the amount will be significantly less than owed or nothing at all because the Court will consider a landlord’s claims of less importance than those of other creditors.
Chapter 13 is a repayment plan for individuals based on current and expected future income. The debtors can impose a Court-approved debt management plan on the creditors and enforce the plan against uncooperative creditors. The debtor keeps his property and makes regular payments to the Trustee out of future income to pay creditors over time, usually 3 to 5 years. Repayment in Chapter 13 is usually not in full, but can range from nothing to 100% depending on the debtor’s income and the types of debt.
Accordingly, a landlord needs to know the final approved payment plan of the bankruptcy in conjunction with relatively certain income in order to determine whether the applicant can be expected to pay the rent or whether, for the same reason, an existing tenant should be allowed to remain in tenancy. If the debtor has a good job which he/she has had for a reasonably long time, he/she might be in a better financial condition and more able to pay the rent on time than many
applicants who have never filed for bankruptcy.
Chapter 7 is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 Trustee, with the proceeds being distributed to creditors according to the priorities among creditors established by law. A Chapter 7 usually discharges all debts except for those which the debtor agrees to keep – e.g., he/she doesn’t discharge his/her car loan because a vehicle is necessary to remain employed or keep a business going.
Filing for Chapter 7 is in no way the same as obtaining a discharge of debt under Chapter 7. Theoretically, one could file as often as he’s willing to pay the related attorney fees and filing fees. That is, if the Court denies his filing one
month, he could file again at a later date. Such multiple filings might indicate fraud against creditors. If, however, one obtains a discharge of debt under Chapter 7, he cannot obtain another discharge for at least 8 years.
Accordingly, similar to Chapter 13, a landlord needs to know which debts were not discharged, ongoing payments regarding those items and bankruptcy in conjunction with relatively certain income in order to determine whether the applicant or an existing tenant can be expected to pay the rent.
Finally, I would comment that you should certainly be discussing the matter with the applicant if you are considering him as a tenant. Sometimes there are derogatory items in credit reports that can be ignored once the landlord has all the details of the issues and has independently confirmed them.
For a lot more discussion regarding tenant bankruptcy see our Mini Training Guide titled “9 Tenant Bankruptcy Issues.”
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Question 2
I’m trying to find out what the rate of depreciation is for carpet under California law.
Answer 2
I’m not certain whether you are inquiring about (1) depreciation under the IRS Code (which will likely be the same when reported on state income tax returns) or (2) how to take depreciation into account when charging a tenant for damages.
While they are both issues regarding depreciation, the answer will be significantly different.
The depreciation that is allowed when charging for damaged carpet is not likely defined by law. However, if the matter goes to court before a knowledgeable judge and with the tenant being knowledgeable or having a competent attorney then the method used must be reasonable. This usually means that when calculating damage the landlord must take into consideration:
- expected life of the carpet when new,
- condition of the carpet when the tenant moved in (if not new),
- length of tenancy,
- condition of the carpet when the tenant moves out, and
- that the tenant cannot be charged for normal wear & tear.
The rate of depreciation for income tax purposes is specified under the IRS Code and depends on:
- recovery class,
- applicable recovery period,
- convention,
- placed-in-service date,
- basis for depreciation, and
- depreciation method.
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Question 3
I have been using many addendums to the California Residential Lease Agreement. Which ones are currently required for residential properties leased in California in 2013 – e.g., Bedbug, Mold, Carbon Monoxide Detector, other.
Answer 3
It is my understanding that the following disclosures must be provided in CA, either, as required for some, within the lease agreement itself, or, an option for others, by an independent document or an addendum to the lease. The issues mentioned are not necessarily the only ones of concern or the latest versions of the laws, as laws are continually changing. Also, there may be federal or local laws that are more stringent than the state’s. Accordingly, I highly recommend that you independently research the disclosures and other issues related to federal, state, and local laws.
Most issues must, by law, be disclosed to the applicants/tenants prior to executing the lease agreement and most must be disclosed in writing. Even if not required by law, all disclosures should always be made prior to lease signing and be made in writing, preferably with signatures of all adult occupants – which should always be all occupants having legal capacity, i.e., all who are at least the legal age or are legally emancipated minors – so that the landlord can prove having made disclosure.
- Lead hazard disclosures as have long been required.
- Prior to commencing lead paint renovations, certain other disclosures may be required – certain types of housing units are exempt.
- Every lease agreement must include a statutorily-defined notice regarding the existence of public access to database information regarding sex offenders.
- If any gas or electric service for which the tenant will be paying for and the lease premises also serves other areas – e.g., common areas or other rental premises. If so, the manner by which costs will be fairly allocated must be
disclosed. - If there are military ordnance locations within one mile of the property, the landlord must disclose in writing that these locations may contain potentially explosive munitions.
- Prior to lease execution, landlord must provide written disclosure when landlord knows or has reason to know that mold exceeds permissible exposure limits or poses a health threat and must provide a consumer handbook developed by the state department of health services that describes the potential health threats from mold.
- Landlord must give each tenant a copy of the notice provided by the registered structural pest control company if a contract for periodic pest control service has been signed.
- If landlord has applied to demolish the unit, landlord must provide written notice of the fact to prospective tenants before accepting any deposits or screening fees.
- For leases signed after January 1, 2012 by someone who has not previously occupied the unit, landlord must provide a lease clause describing the areas where smoking is limited or prohibited.
- For a rental property of 1 to 4 units, prior to signing a lease agreement the landlord must provide written disclosure of the receipt of a notice of default. This disclosure must be available in a number of languages.
- Contamination related to illegal drugs can require specific disclosures.
- Although only required for businesses that employ 10 or more persons, it is recommended that landlords post a Proposition 65 warning notice on the premises.
Again, the above discussion summarizes those issues of which I am currently aware and as I understand them. It may not include all issues of importance to CA landlords and the brief summaries provided may not include everything that a landlord must know in order to comply with federal, state, and local laws. Also, the law may require written disclosure even if the above summary does not so state.