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Stemming Abusive Bankruptcy Filings by Stay-Hiding Residents.

When Senators return to Capitol Hill for the second session of the 106th Congress they will continue discussions of S.625, the Bankruptcy Reform Act. One of their first actions is scheduled to be a vote on an amendment introduced by Senator Russ Feingold (D-WI) that threatens to weaken section 311 of the Act, which the National Apartment Association (NAA)/National Multi Housing Council (NMHC) Joint Legislative Staff worked diligently to include. This key apartment industry issue will unfold over many months in 2000.

The amendment was placed on the calendar in the Senate after the House version (H.R. 833) passed in May by a vetoless majority of 313-108. The language of section 311 was advocated by the apartment industry, and specifically lobbied for by the NAA/NMHC Joint Legislative Staff and the Apartment Industry Mobilization Network (AIMS). The provision creates a limited exemption for residential rental property owners and managers from the automatic-stay provision of the Bankruptcy Code.

Legislative Background

Under the current Bankruptcy Code, all judicial proceedings that potentially affect an asset of the bankruptcy estate, including evictions, against an individual are automatically stopped when a debtor files for bankruptcy. The NAA/NMHC Joint Legislative Staff has lobbied Congress to include language that exempts property owners from the mandatory stay provision, arguing that it unfairly and negatively impacts property owners, makes eviction of non-paying residents without valid leases more time-consuming and costly, and delays occupancy of apartment homes by new residents while the former resident hides behind a legal loophole.

Section 311 exempts eviction and unlawful detainer proceedings from the mandatory stay if the lease has expired, by a violation of its terms such as nonpayment of rent, or by other operation of state law. Amendments 2748 and 2779, a modified version of 2748, introduced by Senator Feingold before the November recess, would not completely destroy section 311 as it was reported in the Senate, but would delay and levy a cost on property owners attempting to reclaim possession of an apartment home occupied by a resident not paying rent or who has overstayed the lease term after filing bankruptcy.

Letters, telephone calls, and personal visits by the AIMS network, along with the work of the Joint Legislative Staff, played a key role in securing the current language of section 311. Senator Feingold's amendment is aimed at protecting low-income families seeking a fresh start under the Bankruptcy Code by allowing residents to remain longer in their apartments without paying rent, often beyond the term of their lease.

This amendment, however, protects one family at the expense of many. Low-income families who can meet their lease obligations are on waiting lists for affordable housing as the demand for apartments continues to outdistance the supply. The Feingold amendment forces responsible residents to wait months for apartments occupied by non-paying residents. The eviction process already contains numerous procedural protections for residents, ensuring they have the necessary time to solve a payment default or secure other living arrangements.

Manipulating the Code

Resident abuse of the Bankruptcy Code as a method of living rent free is not a new phenomenon, but its effects have become epidemic in recent years. Consumers are increasingly turning to bankruptcy to resolve their debts. In 1989, Judge Vincent Zurzolo of the United States Bankruptcy Court for the Central District of California found that from the more than 50,000 bankruptcy cases in the Central District, many were filed listing no other creditors besides the resident's property owner. To him, this indicated a mass filing of bankruptcies with the sole intent of frustrating the eviction process.

Under the current operation of law, a resident whose lease has expired, or who has stopped paying rent, ultimately becomes the subject of eviction proceedings, also called unlawful detainer actions. The eviction process is a time-consuming procedure, undertaken by property owners as a last resort, with a structure that provides protections and notice to residents and enables them to remedy the defaults or violations that gave rise to the action. Nevertheless, residents around the country who find themselves facing eviction are filing bankruptcy to take advantage of the additional protection of the mandatory stay provision in the Bankruptcy Code.

While some individuals are so adept at this manipulation that they file bankruptcy multiple times, others are victims of what Judge Zurzolo calls, "bankruptcy mills." These "bankruptcy mills" advertise that they can get a resident several months of free rent. The lawyers and paralegals collect fees from people who can't afford the rent and file bankruptcy on their behalf, often not informing the resident of the effect a bankruptcy filing will have on their credit history. Sometimes the resident is not even aware they are filing bankruptcy, believing that the stay of eviction proceedings is accomplished through an appropriate form of legal relief.

Once the mandatory stay is in place, the property owner must go to court and file a motion to have the stay lifted. Says Judge Zurzolo, "The resident almost never appears at the hearing on the landlord's motion for relief from the Stay. When a resident does appear, I always inquire as to the purpose of the bankruptcy case filing. Invariably the debtor tells me that they filed in order to stay eviction from residential real estate property."

When a resident fails to appear and contest the motion, the stay is lifted and only then can the property owner move ahead with eviction proceedings. This entire process can take many months, during which time the property owner has collected no rent on the apartment home, has not been able to re-rent it, and has incurred the expense of attorney fees and court filings. In Los Angeles County alone, the Sheriff's Department estimated that, in 1996, more than 3,886 residents used the automatic stay simply to avoid eviction. This accounts for more than seven percent of the department's caseload and cost rental property owners an estimated $6 million in one year alone.

National Bankruptcy Review Commission

This abuse is not confined to California. According to a report from the National Bankruptcy Review Commission, a Florida property management company witnessed an increasing number of residents faced with eviction who are filing for bankruptcy with the purpose of delaying the eviction. The Commission received hundreds of letters from property owners in virtually every state urging bankruptcy reform to combat a costly abuse of the system. Because 96 percent of the rental apartment industry is made up of small businesses, the Review Commission heard from many property owners who had suffered significant financial detriments from residents abusing the bankruptcy laws.

One manager reported that her 1994 net income from a 12-unit building was $1,535. In 1995, she suffered a net loss of $2,306. Another owner had a more upsetting story. She reported that her resident managed to delay the process and live rent-free for six months, during which time the resident was cited repeatedly by the health department and caused $20,000 in property damage. Only after six months and four hearings, none of which the resident attended, was the marshal able to evict the resident. The total cost to the owner amounted to $40,000, including damages, legal fees, and lost rent.

Another story of abuse by stay-hiding residents was presented to Congress in March 1998. Testifying on behalf of NAA/NMHC, Karen Cosgrove, vice president of operations for Kemp Management in Austin, Texas, told the Commercial and Administrative Subcommittee of the House Judiciary Committee about an Army colonel who hired Kemp Management to lease his single-family home. After 15 months, the resident stopped paying rent. After sending several notices requesting payment, the colonel sent a notice to vacate. When the resident requested a modest extension, the colonel agreed, but the resident failed to pay at the end of the extension and went into a second month of default.

The colonel left his station overseas to work out a payment schedule or have the resident evicted. When he arrived he found the house in shambles: doors torn off hinges, a toilet ripped out of the floor, broken windows, and floors strewn with debris. The colonel gave the resident the state-required three-day notice to vacate, and when that time expired without response from the resident, he filed court papers/for eviction. The resident was in a third month of nonpayment when the court granted the eviction.

A day after the constable set a date of eviction, the resident filed for bankruptcy, effectively stopping the eviction process and forcing the colonel to make a motion in bankruptcy court to lift the stay. By the time the resident was evicted, they had lived rent-free for over seven months, had caused further damage, and had cost the colonel more than $21,000. The resident's bankruptcy was dismissed six months later for noncompliance with the bankruptcy rules.

The change advocated by NAA/NMHC that has been incorporated into the Bankruptcy Reform Act would help eliminate problems like this from occurring. We continue to work to ensure that the Bankruptcy Code is not used as a tool for abuse by residents. With the help of the AIMS grassroots network, the Joint Legislative Staff will continue to press Congress in 2000 to enact meaningful reform to the automatic stay provisions of the Bankruptcy Code.

Units welcomes your comments on this article. Please email; fax to 703/518-6191; or write Units, 201 N. Union St., #200, Alexandria, VA 22314.

Eric Stine Eric P. Stine is a Legislative Analyst with the National Multi Housing Council with primary responsibility for legislative tracking and special projects for the NAA/NMHC Joint Legislative Staff Program.

Jay Harris James (Jay) W. Harris is Vice President of Property Management on the NMHC/NAA Joint Legislative Staff with principal areas of responsibility for fair housing, bankruptcy, accessibility and other property management issues. Prior to joining the Joint Legislative Staff, he ran the National Association of Home Builders' (NAHB) Housing Credit Group.
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Author:Harris, Jay
Geographic Code:1USA
Date:Jan 1, 2000
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