Can a Rent-Stabilized Lease be Treated as a Bankruptcy Asset?

For the first time in history, a United States Court of Appeals has been given the task of determining whether elusive rent-stabilized leases can be treated as assets under bankruptcy law. The outcome could affect thousands of Chapter 7 bankruptcy cases in New York City and, perhaps, in other urban areas with similar rent protection programs.

The New York Times recently highlighted the financial plight of Mary Veronica Santiago, who was forced to file Chapter 7 bankruptcy after falling behind on her credit obligations. Although Santiago – who resides in a rent-stabilized apartment in New York – has stayed current on her rental payments, the Chapter 7 trustee overseeing her case is attempting to treat her lease as a bankruptcy asset. This follows from the offer by Santiago’s landlord to buy out the rent-stabilized lease. The Chapter 7 trustee argues that this would provide needed cash to pay Santiago’s creditors and that the lease is a valuable asset that the trustee is authorized to sell. Thus far, both the bankruptcy court and the district court have sided with the trustee in treating the lease as an asset.

The attorneys for Santiago are disputing this, arguing that rent-stabilized leases are considered a public assistance benefit, similar to Social Security or disability payments, and should therefore be exempt from the bankruptcy estate’s reach, the news source reported. Further, her representatives argue that the New York laws attached to rent-stabilization are designed specifically to protect individuals who qualify for affordable housing assistance, a protection that would be in jeopardy if bankruptcy courts were permitted to treat them as assets.

One of the bigger questions surrounding the case is whether treating rent-stabilized leases as a bankruptcy asset will upset housing stability and threaten low-income families, many of whom are already susceptible to financial struggles and an increased bankruptcy risk.

“It’s an unfair money-grab,” David Shaev, New York state chairman of the National Association of Consumer Bankruptcy Attorneys, told the Times. “To remove this foundation, this safety net, it’s unconscionable.”