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Tenant screening is a crucial aspect of landlord duties. However, the work may become so routine that you forget to examine reports thoroughly. Some landlords may not even notice red flags like bankruptcies on the applicant's financial statements.
It can sometimes be confusing for landlords looking at two cases of bankruptcies - dismissed and discharged bankruptcies - when doing a background check on tenants. Landlords should be familiar with these terms and the difference between them.
Read this blog article about the meaning of dismissed and discharged bankruptcies.
What is a Bankruptcy?
Individuals and businesses file for bankruptcy when they can no longer pay their debts. This legal procedure can either discharge the debt or help develop a payment plan. Bankruptcy has different types, and specific terms may vary based on the merits and circumstances of the case.
It can happen that a bankruptcy case allows for the liquidation of the debtor’s assets to pay some or all of the debts to the creditors. But situations vary for whoever files for bankruptcy.
Dismissed Bankruptcy
Bankruptcy dismissal occurs for various reasons. It can mean that the filing isn't appropriate, the debtor fails to meet the terms, or the court discovers the fraud. The debts included in the bankruptcy won’t be erased if the court dismisses the case.
There are requirements that the debtor has to fulfill before the bankruptcy trustee processes the case. If the debtor fails to provide items, such as the latest statements from creditors and paystubs, the trustee may decide to stop the bankruptcy process. Not attending debt counseling can also be a cause for bankruptcy dismissal.
In most cases, a dismissed bankruptcy will appear on credit reports. It can happen when the court notifies credit bureaus regarding bankruptcy dismissal. However, the debtor can dispute it with the credit reporting agencies, which will then remove the dismissed bankruptcy report if the court doesn’t respond to the investigation.
Discharged Bankruptcy
A discharged bankruptcy is a win for the debtor because it wipes away the debts included in the bankruptcy filing. The court will release a discharge order to the debtor and creditors stating the outcome of the case.
Collection of payment on the debts included in the case or any communication with the debtor relating to the said debts will no longer be allowed after a discharged bankruptcy. The debtor won't have to pay any of the debts mentioned in the discharge. In some cases, however, the court may decide to develop a payment plan related to the bankruptcy.
Types of debts that should never be listed in a discharge are condo fees, alimony or child support payments, student loans, damage to property payments, and DUI debt.
What Should Landlords Do If Potential Tenants Have Bankruptcies?
Bankruptcy filed by prospective tenants can have negative consequences for your rental business. Be sure to take these steps if bankruptcy shows up on tenant background check or screening.
Contact Previous Landlords
There are various reasons why a person files for bankruptcy. It can be that the person has an extravagant (wasteful) lifestyle or has problems handling financial matters.
In this case, you should ask previous landlords if your potential tenant has met his past tenant obligations. You can better address concerns about the applicant if you learn about his rental history.
Ask for Additional Financial Information
Even if your potential tenant has filed for bankruptcy in the past, it doesn’t mean he lacks the financial means to afford rent. So, requests an employment certificate, pay stubs, or bank statements to prove that he can fulfill his tenant obligations.
If the person is willing to share, you can also ask about what financial obligations that lead to bankruptcy.
Look at the Credit History
Filing a bankruptcy is a step toward re-starting their financial situation. If the motion to file a bankruptcy happened three or five years ago, consider looking at the latest credit history of your potential tenant to decide whether the person deserves to rent your property.
Positive points in the credit history include making timely payments, having below 30% credit utilization rate, and a better credit mix. If the applicant has improved his credit since the bankruptcy, give him a chance to be your tenant.
Collect a Larger Security Deposit
Potential tenants who have filed for bankruptcy are aware of their lack of chances to get a spot in your rental property. In this case, you can ask for a larger security deposit to ease the financial risk of the applicant.
Takeaway
Landlords should know how the filing for bankruptcy of a potential tenant can affect their rental business. It’s crucial to learn the difference between dismissed and discharged bankruptcies that may appear during the tenant screening. This way, landlords can ensure they’re renting out to tenants who have the capacity to pay rent.
