Court Rules That Rent-Stabilized Leases Have Value in Bankruptcy
Court find value in rent stabilized apartments, for people filing for bankruptcy protection this could mean being evicted.

November 05, 2011 /24-7PressRelease/ -- Today, about one million apartments in New York City are covered by rent stabilization. Rent stabilization is a system of rent regulation that protects tenants from dramatic increases in rent. In addition, with a few exceptions, tenants in rent-stabilized apartments have the right to renew their leases.

Rent stabilization is only applicable to certain building and tenants in New York City. Generally, rent stabilization applies to all apartments in buildings with six or more units constructed between Feb. 1, 1947 and Jan. 1, 1974; those tenants in complexes with six or more units built prior to Feb., 1, 1947, provided they moved in after June 30, 1971; and, apartments in buildings with three or more units constructed/renovated since 1974 that receive special tax treatment.

Considering the limited availability of rent-stabilized apartments and the significant protections afforded their occupants, it is no surprise that a property with rent stabilization comes at a premium. But what if a tenant in a rent-stabilized apartment seeks the protections of a Chapter 7 bankruptcy? A recent court order issued in the U.S. Bankruptcy Court for the Southern District of New York illustrates one way this question may be answered.

Allowances for Debtor in New York Bankruptcy Court

When David Goldman sought the protections of bankruptcy on March 29, 2011, he was occupying a rent-stabilized apartment at 420 Riverside Drive. His lease turned out to be quite a valuable asset, and was the primary subject of an August 4 court order.

In a Chapter 7 bankruptcy, all of a debtor's property and assets are collected in an imaginary "pile." Then, everything that is covered by New York state exemptions is removed from the pile -- debtors get to keep this property. After removing exempt items, a Chapter 7 Trustee assigned by the court manages or sells anything remaining in the pile for the benefit of creditors (those to whom the bankruptcy filer owes outstanding debts prior to the Chapter 7 discharge).

The August 4 court order authorized Mr. Goldman's Trustee to sell back to his landlord Mr. Goldman's remaining interest in his lease. The terms dictated that the sale would be for $60,000, $5,000 of which would be paid directly to Mr. Goldman upon his timely, voluntary vacation of the premises.

The vacate date was set for May 31, 2012; until then, under the court order Mr. Goldman may continue to live in his apartment without making any rent payments. Alternatively, if Mr. Goldman vacated prior to May 31, the landlord would be obligated to pay him an amount equivalent to the rental value of the apartment up until May 31 (i.e., monthly rent at the apartment was set at $1,296.62, so if Mr. Goldman left on April 30, 2012, he would receive $1,296.62, on March 31 $2,593.24, etc.). Furthermore, the court ordered that Mr. Goldman's security deposit be returned to him.

What the Order Means For New Yorkers

The recent court order in Mr. Goldman's Chapter 7 bankruptcy case shows the significant value of possessing a rent-stabilized lease and the potential harm that this value may have for those who file for bankruptcy protection.

If the bankruptcy Trustee finds that there is value in a rent-stabilized lease, the debtor may find him or herself homeless after being evicted so that the trustee can get a hold of the value in the lease. Specifically, debtors who live in rent-stabilized apartments in wealthier neighborhoods may be at the most risk of eviction, as these rent-stabilized leases may possess the most value.

Because eviction is now a distinct possibility for debtors who live in rent-stabilized apartments, it is extremely important that debtors speak with an experienced bankruptcy attorney to understand all of the benefits and potential negative consequences, including the possibility of losing one's home, which may result from filing for bankruptcy.

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