Q: I own several rental properties and have had tenants who had trouble paying the rent, but the economy seems to have hit my tenants very hard. Several tell me that their work hours have been cut back or they have been laid off. It is getting much more difficult to collect the rent. I am even accepting partial payments, as some rent is better than nothing. One of my tenants still hasn’t paid any of last month’s rent and admitted to me that he is considering bankruptcy. What should I do?
A: I have heard similar concerns from many landlords, and it is important for landlords to be assertive and communicate with their tenants who fall behind on the rent. While you may have compassion for your tenants, you need to be even more diligent in your rent collection efforts or you will find your own financial situation will be at risk. I always suggest that you immediately contact your tenants as soon as the rent due date has passed. Depending on the track record of your tenant, a simple reminder phone call may be the appropriate first step. Making phone calls is fine, but you should document your conversations in writing for your tenant file as well as send letters to your tenant confirming any promises to pay or agreements that have been reached. The written documents will be helpful, but to be safe you should consider serving your tenant with the required legal notice. You can explain that you understand they will be paying soon as they promise, but you just need to start the legal process anyway. My experience is that some tenants will suddenly became impossible to locate after they miss a promised payment and then you will not be able to serve your legal notice to start the eviction process.
As the economy has faltered, one last-ditch effort some tenants make when they’re in financial trouble is to file bankruptcy. Although the rental housing industry continues to lobby for changes in the federal bankruptcy code, many rental owners are dealt a severe financial blow when a tenant files bankruptcy during the eviction process. When the federal bankruptcy action has been filed, your state court eviction proceeding cannot be filed or completed because the bankruptcy results in an automatic stay (halting) of the eviction. As soon as you become aware of the bankruptcy, you must stop any collection or eviction efforts, because there are severe penalties for rental owners who violate the stay. You will be required to file pleadings with the federal bankruptcy court requesting the issuance of a Relief from Stay in order to proceed with the eviction. Even if you routinely handle your own legal work, have an attorney handle all tenant bankruptcy matters.
Q: I recently had to evict a tenant and now have a judgment for the back rent and some property damage to my rental home. I am not sure how to proceed. Can you give me some pointers on collecting judgments?
A: When you win in court and your tenant owes you for unpaid rent, damages or legal fees, you’ve received a money judgment against the tenant. But the judgment isn’t worth much to you unless you’re able to collect. If you know that the tenant has a job or other unencumbered assets, in most states you may be able to obtain a court order to garnish his salary or have local law enforcement seize the assets and sell them, with the net proceeds of the sale given to you.
The majority of deadbeat tenants aren’t easy to locate, so your best bet may be to hire a licensed collection agency to attempt to locate and collect your judgment from the tenant. These agencies are typically paid on a contingency basis and receive a portion of the collected amount, typically ranging from one-third to one-half of the amount they collect.
Although you may want to make your own efforts to enforce the judgment, remember that collection agency success rates and fees are often tied to the age of the bad debt. So the sooner the judgment is submitted for collection, the easier it is for the agency to collect and the lower the fee.
Your success in collecting judgments often depends on how hard you worked at the beginning and throughout the tenancy. The rental application typically contains very valuable information for a collection agency, including the tenant’s Social Security number, prior addresses, current and prior employment information, banking and credit-card accounts, vehicle information, and emergency telephone numbers — so if you required your tenants to complete the application and verified its accuracy, you have a great place to start.
This column on issues confronting tenants and landlords is written by property manager Robert Griswold, author of "Property Management for Dummies" and co-author of "Real Estate Investing for Dummies."
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