Could Filing Chapter 13 Save my Rent Stabilized Lease in New York City?

A current loophole in the bankruptcy laws in New York City could put your rent stabilized lease at risk.  Depending on such factors as the market value of your apartment or desirability of your building there is a real possibility that your rent controlled lease could be sold in your bankruptcy.

We all have eyes on one case in the 2nd Circuit Court of Appeals that has a decision pending that could affect other New York rent stabilized leases.  The case of Mary Veronica Santiago-Monteverde v. John S. Pereira rang an alarm in bankruptcy circles and has many clients with rent stabilized leases especially wary of filing Chapter 7 at the moment.   The New York Times even had a front page article titled “Widow’s Bankruptcy Case Poses Risk to Rent Stabilized Tenants.” It’s been in the news, but sadly however, many other New Yorkers have already lost their rent stabilized leases in Chapter 7 cases.  So while the Santiago-Monteverde case may not be the most important case regarding rent stabilized leases it has been highly publicized and has everyone anxiously awaiting the appeals court’s decision.

The petitioner, Ms. Santiago-Monteverde, fell upon hard times after her husband died and at 79 needed to file for Chapter 7 Bankruptcy protection.  She has been living in her East Village two bedroom apartment for 50 years.  With her rent stabilized lease she has been paying only $700 per month even though the 2013 market value would be closer to almost $2500.  She needed to discharge $23,000 in bad debt, but was paying her rent and owed none of this amount to her landlord.  Nevertheless, upon discovering her bankruptcy filing her landlord contacted the bankruptcy trustee assigned to the case, Mr. John Pereira, and offered to pay 100% of her debts plus the trustee fees if Pereira would sell the rent stabilized lease to the landlord.  Although many trustees would find this offer to be abhorrent and against the very spirit of bankruptcy the trustee assigned to this case, Mr. Pereira, agreed to the offer.

Ms. Santiago-Monteverde’s attorney was caught off guard by this and tried to argue that the lease was similar to items listed as exempt under section 282(2) of the Debtor Creditor Law.  Rent stabilized leases are not specifically listed as exempt so the judge in the case from the US Bankruptcy Court for the SDNY agreed with the trustee that the lease could be sold to the landlord. 

It’s important to note that at this point the trustee proposed an arrangement that would allow Ms. Santiago to live out her years in the apartment at a similar rent to what she has been paying under the rent stabilized lease.   This agreement however was to have no rights of succession which would have allowed her 50 year old son to take over the lease once she passed.  It seems clear from the transcripts in the hearing that the judge in the case felt like this was a pretty good deal for Ms. Santiago-Monteverde and in line with the spirit of the bankruptcy code.  On the one hand she would be getting a fresh start and would be able to stay in her home for the rest of her life, but on the other hand there would be some consequence to her filing bankruptcy in the form of her losing the succession rights of the lease. 

Despite this offer from the trustee Ms. Santiago-Monteverde appealed the decision but it was upheld by the US District Court SDNY.  It is now being reviewed by the Federal 2nd Circuit Court of Appeals whose decision on this case may have an impact outside of New York City as well.  The 2nd Circuit will have to weigh the question of whether a rent stabilized lease can be considered an asset like a house or a car that could be liquidated to satisfy creditors, or if it is more like a public benefit like social security or food stamps that should be protected in bankruptcy.

As the court has been deciding the issue Ms. Santiago-Monteverde meanwhile filed a motion to convert her Chapter 7 case to a Chapter 13 case in the lower bankruptcy court.  Provided you qualify, anyone filing bankruptcy has the automatic right to convert a case from a Chapter 7 to a Chapter 13 midway as long as it was not done in bad faith.  The trustee in this case, Mr. Pereira, believes she is intentionally delaying repayment of her creditors with this tactic and he is arguing that converting to a Chapter 13 now has been done in bad faith.  The lower court has yet to rule on whether she may convert the case to a 13, and the Federal Circuit court should also be ruling on her appeal soon as well.

So what should you take from this case if you are considering bankruptcy but also need to protect rent-stabilized lease in New York City?  First of all we know from this and other cases in New York that it is now possible to lose your rent stabilized lease if you file for Chapter 7 protection.  Since opinions on this issue vary among trustees widely and since trustees are randomly appointed to bankruptcy cases there is no way to know if the trustee in your Chapter 7 case will want to go after your lease.

Under section 365(d) (1) of the US Bankruptcy code a trustee has 60 days from when the case is filed to assume or reject your lease.  The leases for most people filing for Chapter 7 add no value to the bankruptcy estate and are usually rejected, but this is not the case with valuable rent stabilized apartment leases in New York.  The trustee may see your rent stabilized lease as an asset to be distributed to your creditors.  The Federal 2nd Circuit Court of appeals may overturn this argument, but as of now a rent stabilized lease could be in danger in a Chapter 7 case.

Filing for Chapter 13 on the other hand will give a bankruptcy petitioner more protection for their rent stabilized lease.  Unlike a Chapter 7, a petitioner has the right to dismiss a Chapter 13 case assuming it was filed in good faith.  A Chapter 13 plan will require you to repay a portion of your debt as opposed to the discharge associated with a Chapter 7, but the repayment plan will prevent your lease from being put on the chopping block by the trustee.  In New York it is possible to have a very affordable Chapter 13 repayment plan for only three years or less in some cases.  If you are unwilling to risk your rent stabilized lease in a Chapter 7, then filing for Chapter 13 may be the way to go, but every financial situation is different and you should first consult an attorney.

There are many other benefits to filing Chapter 13 Bankruptcy in New York beyond protecting a lease as well.  If you are considering Bankruptcy protection in New York City and are looking for an attorney familiar with protecting rent stabilized apartments through Chapter 13 please contact the Law Offices of William Waldner.  Reach us online or call 212.244.2882.  As of 8/31/16 we have a 99% Chapter 7 Bankruptcy discharge record in New York City and have never lost a rent stabilized lease in a bankruptcy case.

This article is intended for educational purposes only.  By reading this article no attorney-client privilege has been created.