- The Washington Times - Wednesday, April 20, 2005

In the world of real estate investing, the worst nightmare is the reptilian tenant who slithers into your investment and starts abusing your rights as a landowner by using tenant law against you.

This tenant never intends to pay for rent and, furthermore, doesn’t care about the property and continues to damage it throughout his or her stay.

If you ever are involved in this scenario as a landlord, you need to be prepared for a rough financial ride. Those with mortgages need to be ready to make those payments without the support of the renter’s money.

Until your case is settled, there’s generally nothing you can do about it. Most court systems and tenant laws tend to favor the tenant over the landlord.

Congress passed a bankruptcy bill last week that creates more balance between the rights of tenants and investors in apartment dwellings. In addition, it creates safeguards forsome homeowners who face bankruptcy.

Some national associations are excited that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 passed. One such group is the National Association of Home Builders (NAHB).

I can almost hear the consumer advocates bemoaning the fact that this gives more control to landlords over their tenants and provides less compassion toward people who are already in financial distress.

On the other hand, it creates a better line of accountability for those who have gone down a path of financial suicide so that they don’t take innocent landowners with them.

NAHB President David Wilson, a custom-home builder from Ketchum, Idaho, says the bill contains two beneficial provisions for apartment owners and homeowners.

“First, it would stop an abusive practice under current law in which delinquent tenants facing eviction can file for bankruptcy, triggering an automatic stay that requires the property owner to stop all eviction proceedings — even if the tenant is damaging property or involved in illegal activity,” he says.

“And second, it recognizes that states should have the ability to set homestead exemptions at levels they deem appropriate,” Mr. Wilson says.

NAHB reports on its Web site (www.nahb.org) that under current law, a tenant is able to exploit the protection of the U.S. Bankruptcy Code’s “automatic stay” provision to forestall an eviction and could remain in a rental property for months without paying rent until a bankruptcy judge lifts the stay.

“These tenants drive up housing costs for the vast majority of residents who pay their rents on time,” Mr. Wilson says. “At the same time, they are also threatening the economic viability of rental properties, particularly subsidized housing properties that have thin operating margins.”

The bill establishes clear procedures for speeding up cases in federal bankruptcy court in which a tenant has defaulted on the lease agreement for failure to pay and then files for bankruptcy.

Under the new law, homeowners who file bankruptcy within 40 months of buying would find that their equity is no longer afforded unlimited protection from creditors. Now, no more than $125,000 of home equity can be protected from creditors, and after 40 months, existing state homestead limits would apply. (A homestead exemption is a state statutory exemption that protects a family’s home property, usually up to a set amount, against the attachment rights of creditors. Property-tax exemptions for all or part of the tax are also available in some states.)

“This provision represents a balanced approach,” Mr. Wilson says. “It gives each state sufficient leeway to set their own threshold and prevents a debtor from shielding assets by purchasing a home in a state with an unlimited homestead exemption.”

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Submit comments or questions to his Web log (https://[email protected]).

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