Jun 162015

Reprinted with permission from Inside Self-Storage, the leader in industry insight and education. Originally published on February 16, 2015.

Bankruptcy continues to be one of the most elusive and difficult topics for self-storage operators to understand. This is for good reason. The laws are written to be so debtor-friendly that, as a creditor, it’s easy to feel abused by the system. Bankruptcy is extremely technical and laden with rules that give creditors no leeway in time to make certain actions or filings.

The best advice I can give is, once you’re aware that a tenant has filed bankruptcy, you should work closely with a knowledgeable bankruptcy attorney who also understands self-storage, if possible. This article aims to provide the “get you through the night” information you need to avoid making mistakes before you speak to a lawyer, plus some terms you’ll hear during the conversation.

Are You in the Know?

The first thing you need to understand is what it means for you to “know” a bankruptcy has been filed. Like everything in bankruptcy, the definition is extremely debtor-friendly. Depending on your jurisdiction, “knowing” your tenant filed bankruptcy can mean coming into contact with almost any form of notice, innuendo or hearsay. That should be enough to make you stop and determine the legitimacy of the information.

Many storage operators think they must receive some sort of written notice from a bankruptcy court or attorney informing them the tenant has filed. That’s inaccurate in almost every jurisdiction. Consider these examples of discovery: a statement by the debtor or someone familiar with the debtor, or even a statement prospectively indicating the intent to file bankruptcy before a sale. Even hearing, “Before you auction my unit, I’ll file bankruptcy, so don’t do it,” is good enough to put you on notice that you must check for the bankruptcy before proceeding.

Automatic Stay

The second thing you need to understand about bankruptcy is “automatic stay.” As indicated by its name, this is automatically issued anytime a bankruptcy is filed. No judge is looking at the filing to determine its merit. Any bankruptcy will result in the issuance of the automatic stay, and that means there are certain things you, as a creditor, can’t do.

Once a bankruptcy has begun, all creditors are automatically halted from taking or continuing any action against the debtor or his property. This includes lawsuits, foreclosures, garnishments, repossessions, lien sales and all collection activity. Thus, you may take no action to collect your debt, such as sending default notices or imposing additional fees or charges on sums that accrued through the date of the filing.

Even if you’re getting ready to enforce your lien and you discover a bankruptcy has been filed by a tenant who’s filed three previous bankruptcies in the last year—all of which have been dismissed—it doesn’t matter. If another bankruptcy has been filed, the automatic stay is in effect, and you may not proceed to sale.

If you didn’t overlock the space before the bankruptcy was filed, doing so after the notice of a filing is arguably a violation of the automatic stay because you’ve done something to enforce your lien against the debtor. While there are exceptions to the automatic stay, none really govern the actions you may take at a self-storage facility.

Snapshot Law

Bankruptcy is a “snapshot in time” kind of law. The moment the bankruptcy is filed, everything prior to the filing is under the bankruptcy “tent” and protected for a period of time by the automatic stay.

However, most forms of bankruptcy require the debtor to become or remain current in his payments post-petition (from the date of filing forward). So don’t be surprised if a tenant who’s three or four months delinquent starts paying rent after his filing. Debts that accrue after the filing date aren’t protected. Everything prior to the date of filing is covered, but the debtor is expected with this fresh start to remain generally current on his financial obligations.

  2 Responses to “Tenant Bankruptcy in Self-Storage: What You Need to Know”

  1. This is a highly useful article indeed for storage owners to aide them in the preparation for any unforeseen circumstances concerning bankrupt tenants. They need to know the right procedures to be taken shortly after a tenant has filed for bankruptcy so as to reap justice in their favour. It would only be just for the storage owners to proceed with the removal of the tenant’s belongings without having to worry about any lawsuits being filed against them.

  2. Great article! What about a situation where the party that is in bankruptcy is not the storage tenant, but he is the owner of property in the unit that is alleged to have been stolen by the storage tenant? Our tenant is not party to bankruptcy at all, but we are being told that we cannot enforce the lien on the property because it belongs to a party in bankruptcy.

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