Should Stabilized Leases Be Exempt from Bankruptcy Proceedings? - Westgate Law

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Should Stabilized Leases Be Exempt from Bankruptcy Proceedings?

New York and California lay claim to the greatest concentration of rent-regulated housing in the United States. Between the two much-loved states there are almost 70 municipalities. These programs were established in various communities after World War I to create balance; a situation in which landlords (or owners) could make a profit while their tenants would have some protection against excessive rent hikes. One popular type of “rent regulated” housing is the stabilized lease.

As the “other” state with the highest concentration of rent-stabilized housing, Californians considering filing for bankruptcy may find a newsworthy NY bankruptcy case interesting that calls into question…should stabilized leases be exempt from bankruptcy proceedings or treated as just one more asset the trustee can sell to generate funds for paying creditors?

The basics of the bankruptcy case: An elderly widow out of New York filed for Chapter 7 protection after her credit card debt piled up to approximately $23,000. At 79 years of age, Ms. Mary Veronica Santiago had lived in the same two-bedroom apartment in the East Village of Manhattan for more than 50 years paying $703 in rent each month according to the terms of a rent-stabilized lease. When Ms. Santiago filed for bankruptcy she was not behind on her rent.

Regardless of the fact that Ms. Santiago was not behind on her rental payments, her landlord took the opportunity to push the limits of the law and attempt to buy out her rent-stabilized lease. He simply approached the bankruptcy trustee (whose job it is to gather Ms. Santiago’s assets in order to sell, generating funds to pay off creditors). The landlord offered cash up front to buy out the rent-stabilized lease pointing out that the cash he was offering would cover the debts owed Ms. Santiago’s creditors. The trustee accepted the offer.

Ms. Santiago, fearing eventual eviction from the only home she has known for more than half a century, objected even though the landlord had made assurances that she would be allowed to live out her life in the apartment. She challenged the decision. After the bankruptcy court and the Federal District court sided with the trustee in accepting the cash for the rent-stabilized lease as an asset, Ms. Santiago appealed to the United States Court of Appeals for the Second Circuit. They will, for the first time, need to weigh in on their decision of whether or not a rent-stabilized lease is to be treated as an asset during a bankruptcy (similar to any piece of real estate or a car). Proponents for Ms. Santiago argue that labeling a rent-stabilized lease an asset would undermine the basic safeguards and essential limitations that rent-regulating laws were designed to provide – not to mention the contradictory nature of such a decision in regards to bankruptcy law. It was designed to provide financial protection for those who needed it…people like New York’s Ms. Santiago.

The state attorney general’s office and the NYC Law Department stated their opinion on the matter when they said that a lease for a rent-regulated apartment isn’t property that can be sold under the current law, but rather that the lease amounted to a public benefit (similar to disability benefits or unemployment benefits) and was similarly exempt from becoming a part of the bankruptcy estate. They argue that stabilized leases cannot legally be seized as an asset in a personal bankruptcy case.

Bankruptcy lawyers involved say the case poses a major risk to New Yorkers who seek bankruptcy protection and happen to live in rent-stabilized apartments or properties. The case could threaten the circumvention of rent-stabilized apartment laws at both a city and state level. And the threat would be coming during a time when affordable housing is in extremely high demand.

Californians who would like more information on how bankruptcy could affect rent-stabilized leases should contact the southern California bankruptcy experts at Westgate Law. We can help you navigate the bankruptcy process and ensure that there are no surprises along the way.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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