BACK-RENT AND CONSUMER DEBT - An Issue Tenants May Face in March 2021

City and county governments and the State of California are encouraging tenants to develop installment payment agreements with their landlords concerning back-rent owed.

Tenants who owe back rent dating from March 1, 2020 through and including January 31, 2021, and who do not agree to a voluntary payment plan with their landlord may be sued in a court proceeding beginning no sooner than March 1, 2021.

While unpaid rent is converted to consumer debt in the Oakland, Alameda County, and many other local eviction moratoria as well as the new state moratorium (AB 3088), the landlord has the authority to sue in Small Claims court to recover this debt. 

Click here for the State's excellent primer to Small Claims proceedings.

The advantage of Small Claims court is that both the landlord and the tenant represent themselves at the initial hearing; attorneys are not allowed to represent either party placing both parties on an “equal” playing ground. The disadvantage to a small claims proceeding is that the actual hearing time in front of the judge, commissioner, or hearing officer is limited leaving scant time for either party to present their case. 

Both parties can bring their documentation to the hearing (or submit it with their initial complaint or answer to the complaint) including such documents as:

• The lease agreement,
• Evidence about how much rent was paid and how much back-rent is owed (bank statements,[1] copies of checks, landlord “Notices to pay rent or to Quit”),
• Email communications and letters concerning rent payments and rent owed, 
• Agreements to pay back-rent, if any, 
• Copies of all signed declarations such as the Declaration of COVID-19 Related Hardship and/or the CDC Declaration, and
• Any other relevant documentation. 

In addition to being sued for back-rent owed, tenants will need to pay court filing fees to answer a court proceeding and incur incidental costs such as copying costs and mailing fees. If tenants lose in court, they can appeal the judgment within 30-days, but attorneys can represent the tenant and the landlord at the appeal hearing.

If the landlord sues the tenant in Superior court and there is an attorneys’ fees clause in the lease agreement awarding fees to the prevailing party, the tenant is likely to have an even larger financial judgment against them for back-rent, costs, and attorneys’ fees. [Look for a clause in the lease agreement entitled “Attorneys’ fees.”]

Judges in both courts encourage parties to settle their dispute in advance of trial through mediation. Mediation services may be offered by the court but in Oakland, the tenant or landlord may be able to apply for mediation services through the rent board.

In either Small Claims or Superior court, a settlement may be achieved before a court judgment, with or without mediation, and an installment payment plan can be incorporated into the settlement agreement.

If there is no settlement agreement, the judge may award a money judgment for back-rent to the landlord. A money judgment could affect the tenant’s credit rating, credit score, and ability to secure new housing.

Collecting on the Debt:

Even with a court judgment, landlords may find it difficult to a collect tenant's unpaid rent.

The landlord may need to secure a wage garnishment from the court to help collect the debt if the tenant is employed. 

The landlord may also attempt to collect the judgment from some of your assets unless these assets are exempt from collection. 

In the alternative, the landlord may hire a collections company to pursue the debt. If the collection company settles with the tenant for the debt, the tenant will be issued a 1099-C for the amount not paid and be required to pay income taxes on the forgiven debt. So, if the tenant owes $10,000 and settles for $1,000, they may receive a 1099-C for $9,000. The 1099-C is considered taxable income.

Bankruptcy:

For tenants with significant amounts of unpaid back-rent that they are unable to pay, bankruptcy may be the only option. Bankruptcy not only affects a tenant’s credit rating but the ability to secure new housing. “Have you ever filed for a bankruptcy proceeding?” is a standard question on rental applications. But, filing for bankruptcy can also provide welcome relief to tenants who not only have unpaid back-rent but also other debt that has mounted during the COVID-19 pandemic; they can get a "fresh start" through a bankruptcy proceeding.

Conclusion:

Net, net, it is better to work out a payment plan with your landlord. While Oakland’s eviction moratorium allows 12-months to repay back-rent, under the new state law, repayment of back-rent must begin no later than March 1, 2021. In Oakland, the repayment period and the installment plan agreement is covered by Regulations that work together with the Oakland Eviction Moratorium, some of which may be modified by the new state law, AB 3088.

[1] Be sure to redact (e.g. mark-out) account numbers, social security numbers, birthdates, and any other personally identifiable information before filing anything with the court as these documents may become part of public record.