The Impact of the Bankruptcy Reform Act on Dispossessory Cases in Georgia

What is every property manager’s worst nightmare? A resident who files bankruptcy. It is a
familiar scenario. It is the first of the month, rent is due, and delinquencies have increased. Your
problem resident owes you three months back rent and is about to be evicted when he walks into
the leasing office and presents you with a bankruptcy petition. His face says it all…he knows
you cannot evict him because he has filed bankruptcy. Your immediate reaction is shock, as you
consider the possibility that this resident may stay in your property indefinitely without ever
paying another penny for rent. The big question is what should you as a property manager do in
this situation?

The bankruptcy law states that the filing of a bankruptcy petition acts as an automatic stay
against all creditors from taking any action to collect money or property of the bankruptcy estate.
The stay prevents property management from demanding payment of rent, filing a dispossessory
case, or continuing with any pending dispossessory case. However, the good news is that the
bankruptcy laws have changed recently and therefore so have the rules regarding the automatic
stay.

In short, as a result of years of vigorous lobbying by creditors groups such as the National
Apartment Association change has occurred. On March 10, 2005 the United States Senate passed
the Bankruptcy Abuse Prevention and Consumer Protection Act for 2005 (referred to as “The
Bankruptcy Reform Act”). President Georgia W. Bush signed the Bankruptcy Reform Act into
law on April 20, 2005 and the Bankruptcy Reform Act became effective October 17, 2005. This
new law made significant changes to the automatic stay provisions which are very beneficial to
the property manager.

Although creditors are still automatically stayed, the Bankruptcy Reform Act added several
significant exceptions, which can be found at 11 U.S.C. § 362(b). Specifically, 11 U.S.C. §
362(b)(22) states that “the filing of a petition under [the bankruptcy code] does not operate as a
stay …to the continuation of any eviction, unlawful detainer action, or similar proceeding by a
lessor against a debtor involving residential property in which the debtor resides as a tenant
under a lease or rental agreement and with respect to which the lessor has obtained before the
date of the filing of the bankruptcy petition, a judgment for possession of such property
against the debtor.” In layman’s terms this means that if you as the property manager file a
dispossessory and the Court grants writ of possession prior to the resident filing a bankruptcy,
then a bankruptcy no longer stays or stops property management from proceeding to execute its
writ of possession. So, you may continue with your dispossessory action and evict your
delinquent resident, as long as you were granted a writ of possession before the bankruptcy was
filed.

The Bankruptcy Reform Act also changed the automatic stay provisions when a bankruptcy filer
has prior bankruptcies that were "pending" within the previous twelve months. This change can
be found at 11 USC §362(c)(3) & (4). If a bankruptcy debtor has one prior bankruptcy that was
pending within the previous 12 months and the case was dismissed then the automatic stay is
only in effect for 30 days. Additionally, if a bankruptcy debtor has two or more prior bankruptcy
cases that were pending within the previous 12 months and the cases were dismissed then there is
no automatic stay.

Having said this, the Bankruptcy Reform Act does have provisions which allow a debtor to
impose or extend the automatic stay when a debtor has prior cases that were dismissed. To
obtain an extension of the automatic stay the debtor must file a motion and provide notice of a
hearing requesting that the automatic stay be extended. However, the "hearing must be
completed before the expiration of the 30-day period" after the bankruptcy was filed. Under 11
USC §362(c)(4)(B), a party in interest may, within 30 days of the commencement of the case
request the stay to take effect and after notice and a hearing the court will determine whether or
not to grant a stay. Keep in mind there is no stay until the Court enters the order.

Prior to the Bankruptcy Reform Act, a resident could file bankruptcy and obtain an automatic
stay, regardless of how many bankruptcy cases he or she had previously filed and regardless of
whether a writ of possession had already issued, they were under eviction, and they were about
to be evicted. Under the old law, management had to stop all eviction proceedings and wait to
see if the debtor failed to pay some future month’s rent. If this occurred the law required
management to file a motion in the bankruptcy court requesting relief from the automatic stay
and have it scheduled for hearing. At the hearing the bankruptcy Judge would decide whether to
modify or lift the automatic stay to allow management to pursue a dispossessory case. Once the
Judge grants the motion lifting the stay, she signs an order authorizing management to proceed
with a dispossessory case. Depending on the facts of your case, you would then either file a new
dispossessory case or continue with an existing case. It typically takes 30 to 90 days to obtain an
Order granting relief from the stay. Under the Bankruptcy Reform Act (the new law),
management still has to follow this procedure if it does not have a writ of possession at the time
the bankruptcy is filed.

However there are some new procedures in the Bankruptcy Reform Act that may allow a
dispossessory case to proceed after a bankruptcy is filed if the basis of the dispossessory case is
that the resident is “endangering the property or illegally using or allowing controlled substances
on the property.” This is a time sensitive and complicated procedure that requires management
to file a certification with the bankruptcy court regarding the facts of your case. This situation is
not very common and you should immediately consult with your attorney if your resident files
bankruptcy and you are in the process of terminating the lease based on illegal drug activity or
conduct that is endangering the property.

Overall, it appears that the term "automatic stay" is now a misnomer and could be more
appropriately termed a “possible stay.” In view of these changes it is important that as a property
manager you consult with your attorney and investigate when a resident alleges bankruptcy. At
this time, most State Court judges and sheriff’s offices are not familiar with this change in the
law. For decades, the usual procedure by the court and the sheriff’s office has been to stop or
stay any dispossessory case when a bankruptcy is filed by the resident. Because the changes to
the bankruptcy act are so new, it will take some time for judges and sheriff’s offices to become
familiar with the new law and change their procedures. It is likely that the courts where
evictions are filed will adopt a procedure of holding a hearing whenever a bankruptcy is filed in
order to determine whether there is a stay in effect, or not.
In conclusion, the Bankruptcy Reform Act has provisions that are designed to stop some of the
old abuses that were being used by residents to delay dispossessory cases. However, it will take
some time for the courts to learn how the new law operates and adopt policies and procedures
that reflect the full impact of this significant change. It clearly is a much needed and welcomed
reform for the apartment industry

By Dave Passino, Esq.

February 2006