What Happens if a Tenant Files Chapter 11 During the Eviction Process?

When a tenant files for Chapter 11 bankruptcy during an eviction process, an automatic stay immediately halts the eviction and prevents the landlord from collecting rent or enforcing lease terms without court approval. The landlord can file a motion to lift the stay if a judgment for possession was obtained before the bankruptcy filing, or if the tenant fails to pay post-petition rent or damages the property. If the tenant rejects the lease as part of their bankruptcy plan, the landlord can terminate the lease and file a claim for damages in the bankruptcy case.

Here's a breakdown of the key legal and practical implications for both commercial and residential landlords, along with what options landlords have in this situation.

Automatic Stay: The Immediate Impact of Chapter 11 Filing

As soon as the tenant files for Chapter 11 bankruptcy, an automatic stay goes into effect. This stay halts all collection activities, including:

Eviction proceedings
Rent collection efforts
Utility shutoffs
Lease termination notices

The automatic stay is intended to give the tenant time to reorganize their debts and business operations without the immediate threat of eviction.

Commercial vs. Residential Tenants: Key Differences

For commercial leases, Chapter 11 bankruptcy is often filed by businesses trying to restructure their debts and stay afloat.
For residential leases, Chapter 11 is rare but can happen if the tenant is a high-net-worth individual or owns multiple rental properties.

The automatic stay applies to both types of tenants, but the specific rules governing evictions vary based on the lease type and the stage of the eviction process.

When Can a Landlord Continue the Eviction Process?

The landlord's ability to proceed with an eviction depends on when the tenant filed for bankruptcy relative to the eviction timeline.

If the Landlord Already Has a Judgment for Possession (Pre-Bankruptcy Filing)

If the landlord obtained a judgment for possession before the tenant filed for Chapter 11, the landlord may be able to continue with the eviction despite the bankruptcy filing.
However, the landlord must seek relief from the automatic stay from the bankruptcy court to enforce the eviction.

🔑 Tip: Relief from the automatic stay is more likely to be granted if the judgment for possession was issued before the bankruptcy filing.

If the Eviction Process Was Still Pending When the Bankruptcy Was Filed

If the landlord has not yet obtained a judgment for possession, the eviction is frozen by the automatic stay.
The landlord must petition the bankruptcy court to lift the stay to continue the eviction process. This can take time and may not be granted immediately.

Special Case: Nonpayment of Rent and Residential Tenants

In the case of residential tenants, if the eviction is based on nonpayment of rent, the landlord has some additional options:

The landlord can file a certification of default with the court showing that the tenant has failed to pay rent after the bankruptcy filing.
If the tenant does not cure the default within 30 days, the landlord may proceed with the eviction.

Rejection of Lease in Chapter 11: What Happens to the Lease?

In Chapter 11 bankruptcy, the tenant has the option to either assume or reject the lease as part of their debt reorganization plan.

If the tenant assumes the lease, they must cure any defaults and continue paying rent going forward.
If the tenant rejects the lease, it’s treated as a breach of contract, and the landlord can terminate the lease and file a claim for damages in the bankruptcy case.

💡 Important: Lease rejection can make the landlord an unsecured creditor, which means they may only recover a portion of the unpaid rent as part of the bankruptcy process.

When Can the Automatic Stay Be Lifted?

Landlords can petition the bankruptcy court to lift the automatic stay for several reasons, such as:

Nonpayment of post-petition rent (rent that becomes due after the bankruptcy filing)
Damage to the property
Illegal activity by the tenant
Lease rejection by the tenant

Courts are more likely to grant relief if the tenant:

Has no realistic ability to reorganize their business
Continues to default on post-petition obligations
Has rejected the lease as part of the bankruptcy plan

Rent Payment Obligations During Chapter 11 Bankruptcy

After filing for Chapter 11 bankruptcy, the tenant is required to pay post-petition rent (rent that comes due after the bankruptcy filing) under the “administrative expense” priority. This means:

Post-petition rent must be paid on time
Failure to pay post-petition rent gives the landlord grounds to request relief from the automatic stay

If the tenant fails to pay post-petition rent, the landlord can argue that the tenant is not fulfilling their obligations and request immediate relief from the stay to continue with the eviction.

What Happens if the Lease Is Rejected?

If the tenant rejects the lease during Chapter 11 bankruptcy, the landlord can:

Terminate the lease
File a claim for damages in the bankruptcy case

Damages are typically capped at:

One year’s rent OR
The rent owed for the remainder of the lease term, whichever is less

However, landlords often recover only a portion of their claim because bankruptcy courts prioritize other creditors.

Practical Considerations for Landlords

Here are some practical tips for landlords dealing with a tenant in Chapter 11 bankruptcy:

Summary of Landlord Options

‍

Key Takeaways for Landlords

Chapter 11 bankruptcy triggers an automatic stay, temporarily halting the eviction process.
If a judgment for possession has already been issued, the landlord can petition to lift the stay to proceed with the eviction.
Landlords can request relief from the stay if the tenant fails to pay post-petition rent or damages the property.
Tenants in Chapter 11 can either assume or reject the lease, which impacts the landlord’s rights and remedies.
Landlords should work closely with a bankruptcy attorney to navigate the process and protect their rights.

What Happens if a Tenant Files Chapter 11 During the Eviction Process?