What happens to a rent controlled lease in Bankruptcy?
Background:
New York current rent control program began in 1943 and in 1974 the Emergency Tenant Protection Act began the regulation of rent-stabilized apartments in New York. Under these laws a landlord is only allowed to raise rent by a certain amount each year based on improvements. However, if the rent is legally raised to over $2,500 per month and the household income is over $200,000 for two consecutive years the regulated status can be lost. This rarely happens. In fact, many New York City rent regulated apartments have been passed down through several generations. Quite often people in these apartments enjoy apartments in luxury buildings at a fraction of the cost as their neighbors.
How are these leases sold in Bankruptcy?
Interestingly, almost any lease can be sold in Bankruptcy. When a Chapter 7 Bankruptcy is filed a trustee is hired to liquidate the debtor’s “estate”. Since a lease is a part of an estate it can be sold. For people who have a normal year-to-year lease this is not an issue since the landlord will not pay to have them leave. Think about it, if you are a landlord and give someone a year-long lease you can always not renew the lease or evict the tenant if he or she violates the lease. With a regular lease it would make no sense to offer a trustee money to kick the tenant out. However, some landlords would love to get rid of there rent stabilized tenants so that they can raise the rent.
When a person with one of these leases files for bankruptcy they are required to disclose their address and list any leases in their petition. Once a trustee is elected to the case he/she will find out about the lease and possibly investigate. In other cases the greedy landlord reaches out to the trustee and makes an offer. From there the trustee just needs to make a simple motion to the court to sell the lease.
Most trustees find the practice of selling rent-stabilized apartments abhorrent. After all, when someone files for bankruptcy they are merely trying to get another chance to move on with their life. Getting a fresh start on the streets does not accomplish this. My office, like many others I assume, has a list of trustees who will or will not engage in this process.
Is there a way to keep my rent-stabilized lease and file for Bankruptcy?
Absolutely, there are a few ways. First, if you live in the projects or your landlord is NYCHA you probably do not need to worry about this. The New York City Housing Authority (NYCHA) is not interested in selling these leases. Second, if you have been offered money in the past to leave your apartment you might consider filing a Chapter 13 Bankruptcy. In Manhattan and the Bronx (and the whole Southern District of New York) the current trustee does not go after these apartments. To my knowledge the Trustees in the Eastern District of New York do not either. Regardless, in a chapter 13 you have almost an absolute right to withdraw your petition if there was an issue.
Always Honor thy mother and father.
Get a family member on your lease before you file for bankruptcy. There is an entire procedure to do this legally as long as your relative lives in the apartment. So if you can, just get someone else on your lease. If you think about it logically, the trustee could call your landlord and offer to sell your interest in the lease. The landlord could even take the offer. However, if your daughter or wife is still on the lease it would be up to them to kick you out, unless they also filed for Bankruptcy.
Bankruptcy laws regarding apartment leases will hopefully change in the future but I wouldn’t waste time waiting for this to happen. Sometimes just being creative is all it takes. If you or someone you care about is interested in filing for Bankruptcy I am happy to fully evaluate their options for free. Just call my office at 212-244-2882 and schedule a one on one consultation.