Michigan Law When a Tenant Declares Bankruptcy

By Beverly Bird

Bankruptcy is governed by federal law, but sometimes state laws can affect the proceedings. If you’re a tenant leasing a property in Michigan and you need to file for bankruptcy, your rights and limitations are much the same as they would be in any other state. Local law may affect your landlord to some extent, however.

Statement of Intent

When you file for bankruptcy, one of the required documents you must submit is a Statement of Intent. If you’re renting your home, on this form you must let the court know if you want to continue with your lease -- in legal terms, you want to assume it -- or if you’re going to reject the lease and move out. Technically, you only have the final word on this decision if you file for Chapter 13 bankruptcy, the one where you enter into a payment plan for several years and give your disposable income to the trustee each month to pay down your debts. In a Chapter 7 proceeding -- the bankruptcy where your debts are erased after your nonexempt property is liquidated to pay as much of their balances off as possible -- the trustee makes the decision as to whether you’re going to keep the rental or vacate the property. As a practical matter, neither the trustee nor the court want to see you left homeless, so if you indicate on the Statement of Intent that you want to stay -- and if you meet certain other requirements -- the trustee generally assumes the lease for you. An exception might exist if its cost far exceeds your means.

Assuming the Lease

If you elect to assume the lease and remain in the rental unit, the terms of the lease will continue as they were before -- nothing changes. You can’t be behind on rent, however, and you must stay current with your payments going forward. Although bankruptcy’s automatic stay prevents your landlord from initiating an eviction action against you if you fall behind, he can file a motion with the bankruptcy court, asking the judge to lift the stay.

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Rejecting the Lease

If you reject the lease, you should be prepared to move out -- if not immediately, then relatively soon. At most, you may have 60 days. This is the length of time the trustee has to notify your landlord as to whether you’re going to reject or assume the lease. If the trustee does nothing, your lease is automatically rejected by law after this time. Either way, when your landlord receives notification of the rejection, you’re obligated to turn the premises back over to him.

Landlord’s Claim

If you owe past due rent at the time you reject the lease, this debt is included in your bankruptcy in both Chapter 7 and Chapter 13 proceedings, and it’s dischargeable. Your landlord can file a proof of claim to try to recapture some of what you owe, but it’s considered an unsecured debt under the federal bankruptcy code so he may not receive the entire balance. Your landlord is also entitled to damages if you rejected or broke the lease, but federal law puts a limit on the amount he’s entitled to. He can claim either 15 percent of what you would have paid in rent if you had stayed in the dwelling for the term of your lease up to three years, or he can claim a year’s rent, whichever is more. Michigan law requires that he take steps to minimize his claim by trying to rent the property out again as soon as possible. If he’s successful, and particularly if he rents it for the same amount or more, he has no claim against your bankruptcy estate.

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