There will be an explosion of new members asking how to Chapter 7 their back rent

[joshuagraham]

All the COVID eviction freezes will mean that folks who used to only get away with maybe a month of rent-free living (i.e., before getting evicted) will now have something like a year of rent in arrears. This debt will be unsecured, and thus a lot of folks will do the calculus and decide to file for Chapter 7 bankruptcy. This will especially be true for folks in high rental-cost areas like CA & NYC. It will be like all the folks who stopped paying on their severely underwater mortgages during the Great Recession.

[justbroke]

The problem with even discharging old debt is that a.) the landlord can still evict you unless you come current, and b.) an actual eviction on your credit report (or in LexisNexis Risk) will likely make it extremely difficult to rent.

[joshuagraham]

The problem with even discharging old debt is that a.) the landlord can still evict you unless you come current, and b.) an actual eviction on your credit report (or in LexisNexis Risk) will likely make it extremely difficult to rent.

The idea would be to find someplace else to go before filing BK. As for the difficulty of renting after eviction, there will be so many renters who have evictions on their record that landlords will be forced to rent to them.

[justbroke]

The idea would be to find someplace else to go before filing BK.

Yes, this is a good strategy and one which I used. But then I realized that I could keep my property and move back in to that property using a lien-stripping technique in a Chapter 13.

As for the difficulty of renting after eviction, there will be so many renters who have evictions on their record that landlords will be forced to rent to them.

I don't think so. The large companies are likely not going to bend on this. By large I mean the national and large-scale property managers. It is likely that some private and smaller companies could look past the eviction if there is job stability and no eviction on record. As a landlord, I had a zero tolerance on evictions. It's simply not a risk that I would take regardless of the overall economy. I have, in the past during the housing debacle, gone 6 months without a renter because I would not rent to anyone with an eviction or without an acceptable risk score from CoreLogic MyRental.

Requesting a larger deposit or multi-month deposit may not be possible in many locales because of laws which prohibit more than 1-2X security. The LexisNexis, CoreLogic, and Equifax Tenant Screening are used too broadly, in my opinion. I wouldn't be able to tell if the person just didn't pay, even though they were employed (not furloughed or laid off), and was just taking advantage of the situation. For the smaller landlord it will be a tough decision (wear and tear without expectation of payment or let the property sit idle).

If the government wants to fix this issue, they would need to quash evictions so that they are not reported or come up with a program. Maybe the government could provide guarantees to landlords, as they do under programs such as the Federal Housing Administrations (FHA's) home loan programs. There are already vehicles under the Housing and Urban Development (HUD) programs such as Housing Choice Vouchers and Section 8 which could accommodate landlords/owners.

It will be interesting, to say the least.

It was recently reported that 25% of families with children and 12% of families without children are not caught up on housing payments (as of September 2020). The distribution would be interesting on apartments and leases versus ownership. For owners, a program such as HARP, to re-amortize the payments to the end of the loan, may prove useful. For those leasing (apartments and homes), it is likely that a HUD program may be necessary in the interim.

From a policy perspective, there will need to be some sort of intervention and some type of program(s) to keep people housed. I do know of large investors that have purchased hundreds of homes in Florida and they rent them for $1,000/month no questions asked. They already factored in the risks since they purchased 700 homes for $7,000,000 back in 2012 during the housing crisis. I'm unsure of the current portfolio size, but they make, at 100% occupancy, $700,000 a month on a $7,000,000 investment. So surely some investors can and do work with a higher risk model.

[flashoflight]

Housing is heavily government subsidized already with Fannie, Freddie, and FHA/VA/USDA. Non-QM loans start at 6% so that tells you how sick the housing market is if we need 1.9% mortgages to prevent a housing market collapse. Remember when the Fed tried to increase interest rates two years ago by just 2% above the Great Recession rates and it almost made the economy go down? To avoid riots and a huge increase in homeless, it may be necessary to subsidize a scheme to backstop landlords with bad tenant bailout or bad tenant investment mortgage insurance. Going forward, there needs to be federal eviction laws that are landlord friendly so there can't be professional tenants or professional squatters in some tenant friendly states like California. An eviction will still make it harder to rent, but someone will do it if there is a government backstop like Section 8.

Bankruptcy is a great tool for the debtor needing a fresh start, but it will do nothing to solve the upcoming housing crisis. In particular, ch7 doesn't really help avoid evictions. It just delays evictions for a short while.

[justbroke]

flashoflight I agree that some sort of program will need to be put into place. Otherwise this could cause a different type of housing crisis which would certainly tank the economy. I'm no economist and have no general ideas, but something like the Economic Injury Disaster Loan (EIDL), disaster assistance loans from the SBA, may be necessary. Unfortunately, the SBA has traditionally required "strong" credit in order to obtain an SBA loan even under the disaster programs. They would need to do something like the CARES Act's SBA 7a (EIDL) loan whereby the credit could be as low as a 570 (Vantage Score 3.0) rather than the typical 650+ that the SBA normally requires.

Going forward, there needs to be federal eviction laws that are landlord friendly so there can't be professional tenants or professional squatters in some tenant friendly states like California.

Yes. This!

I tried to get an SBA loan during my Chapter 13 after my home was damaged from a hurricane (Irma). The SBA rejected me due to credit. I mean, do they really want to help people? If so, then they need to lower the requirements. I know that fraud is prevalent and a booming business. I always said, after Katrina, that if the government is giving away "free" money, they'll be all types of people lined up to line their pockets. That hurts the truly needy landlord, homeowner, businessperson who is having credit problems caused by the disaster.

Here's an example, the CARES ACT authorized the EIDL loans for businesses affected by the COVID-19 pandemic and massive shutdowns. However, by the time the program was available to the "smaller" businesses, those business owners missed payments and their credit scores dropped. Guess what happened? They were denied and it took months to overcome the loan denial and many could not without improving their credit scores. At least Congress has mandated that the SBA look to other ways to determine a borrowers creditworthiness -- or ability to repay -- rather than a credit score. But due to the sure lack of detail in the bills and the implementation, many businesses are now permanently closed.

As an investor, sure I'd like to see good product available in the real estate market, but not at the cost of the entire economy (as in 2008).

The next 1-3 years will be interesting.

[shipo]

My wife and I got bit by the 2008 recession, both losing our jobs, and then ultimately being forced to sell our house at a huge loss; looking at the current situation and relating it back to the recession, my thinking is, this time will be MUCH worse. I'm thinking bankruptcies and foreclosures will be rampant over the next few years. While I have a huge amount of empathy for folks caught up in the COVID-19 driven economic mess, I'm wondering if the next year or two might present us with some opportunities to by a house for well below today's market value. I know that thought is a bit cold blooded, but hey, a family made out when they bought our house in 2013; a house which we paid $120,000 more for in 2002, and which we invested over a quarter-million in upgrades in over the years; maybe it's our turn.

[justbroke]

While I have a huge amount of empathy for folks caught up in the COVID-19 driven economic mess, I'm wondering if the next year or two might present us with some opportunities to by a house for well below today's market value.

That's exactly what I just wrote and I wanted to be sensitive to what people are now experiencing. In the last housing crisis, Bank of America decided to sell a portfolio of 700 homes in Tampa Bay for a mere $7,000,000. (I'll do the math for you, that's $100K each.) That was to get them off the books after the brutal housing market crash compounded with robo-signing, bad foreclosures and foreclosure defense attorneys making banks prove they did everything correctly.

This could quite possibly be a more serious event and the government will need to step in, and soon. It could be years before some of the jobs come back which means people are going to be significantly hurting both financially and emotionally.

If we don't purchase this new inventory -- driven by foreclosures -- then the rich and the large investors/equity funds will buy up all the property. I think it would be better in the long run for common-folk -- like us -- to purchase the inventory rather than let it be gobbled up by billion-dollar private equity funds. (I have nothing against equity funds, but this is how they become multi-billion dollar private equity funds. Real property is consistently one of the best builders of wealth... if you get in the market at the right time, with interest rates below 2%, and a lot of excess inventory creating a buyer's market.)

[bcohen]

Of course there will be millions of renters who will (at some point) reach the point where they are hopelessly behind on their rent, and have no realistic chance of ever bringing their lease current. A large percentage of these people will file for bankruptcy protection in order to discharge this and other debts. Those who file prior to a judgment for possession being granted should be able to "surrender" the leased premises in the context of Chapter 7 bankruptcy, which would prevent the landlord from obtaining a judgment, or reporting a balance owed to the credit bureaus. Even those who file after being evicted can still wipe out the money judgment, which should make it easier to find another rental, assuming the person is now employed and can afford the rent going forward.