Landlords Finally Get Support From Feds

In the world of real estate investing, the worst nightmare is the reptilian tenant who slithers into your investment and starts abusing your rights as a landowner, by using tenant law to support their own lack of a backbone. What I am referring to, is the tenant who never intends to pay for rent and, furthermore, doesn't care about the property and continues to damage it throughout their stay.

Most court systems and tenant laws favor the tenant over the landlord in their dealings with cases between the two. If you ever find yourself involved in this scenario (as a landlord) you need to be prepared for a rough financial ride. For those with mortgages on their property -- you need to be ready to make those payments without the support of the renters' money. And until your case is settled, there's generally nothing you can do about it.

Thankfully, the U.S. Congress has passed a bankruptcy law this week that creates more balance between the rights of tenants and investors in apartment dwellings. In addition, it creates safeguards for those homeowners who face bankruptcy.

Several national associations in the building and real estate arena are excited that S. 256 (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) passed -- one of those is the National Association of Home Builders.

Now, I can here the consumer advocates now, bemoaning the fact that this gives more control to landlords over their tenants and less compassion toward a set of people who are in financial distress. On the other hand, I would point out that it creates a better line of accountability for those who have gone down a path of financial suicide -- so that they don't take land owners with them to their demise.

Noting that the Senate approved the same measure last month, NAHB President David Wilson, a custom home builder from Ketchum, Idaho, said, the bill contains two beneficial provisions for apartment owners and homeowners.

"First, it would stop an abusive practice under current law in which delinquent tenants facing eviction can file for bankruptcy, triggering an automatic stay that requires the property owner to stop all eviction proceedings -- even if the tenant is damaging property or involved in illegal activity," he said. "And second, it recognizes that states should have the ability to set homestead exemptions at levels they deem appropriate."

NAHB reports, that under current law, a tenant is able to exploit the protection of the U.S. Bankruptcy Code's "automatic stay" provision to forestall an eviction, and could remain in a rental property for months without paying rent until a bankruptcy judge lifts the stay."

"These tenants drive up housing costs for the vast majority of residents who pay their rents on time," said Mr. Wilson. "At the same time, they are also threatening the economic viability of rental properties, particularly subsidized housing properties that have thin operating margins."

One of the best provisions of the bill is that it establishes clear procedures for speeding up cases in federal bankruptcy court, in which a tenant has defaulted on the lease agreement for failure to pay and then files for bankruptcy.

Under the new law, in future bankruptcy proceedings, homeowners who file bankruptcy within 40 months of buying would find that their equity is no longer afforded unlimited protection from creditors. Now, no more than $125,000 of home equity can be protected from creditors, and after 40 months, existing state homestead limits would apply ("Homestead exemption" is a state statutory exemption that protects homestead property, usually to a set amount, against the attachment rights of creditors. Property tax exemptions for all or part of the tax are also available in some states).

"This provision represents a balanced approach," said Mr. Wilson. "It gives each state sufficient leeway to set their own threshold and prevents a debtor from shielding assets by purchasing a home in a state with an unlimited homestead exemption."

Published: April 22, 2005