PHA Can Evict Defaulting Resident Who Filed for Bankruptcy

Facts: A public housing resident entered into a lease agreement with the local PHA. The lease required the resident to go through an annual recertification process, which includes reporting any changes in income to the PHA within 10 days to ensure her eligibility for public housing and the accuracy of the rent calculation. She defaulted under the terms of the lease by failing to pay rent when due and by failing to disclose additional household income. The failure to disclose the additional household income resulted in a significant back-charge of over $8,500 in rent to the resident.

The resident filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code. A Chapter 13 bankruptcy is designed for debtors with regular income who can pay back at least a portion of their debts through a repayment plan. The resident eventually failed to make all of the payment due under her Chapter 13 plan and still had $2,640 owing in past-due plan payments. The resident then converted her Chapter 13 case to a Chapter 7 case.

Chapter 7 is a liquidation bankruptcy designed to wipe out a debtor’s general unsecured debts. When you file for Chapter 7 bankruptcy, a trustee is appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your nonexempt property to pay back creditors. If you don’t have any nonexempt assets, creditors receive nothing.

The resident wanted to remain at the site, and the PHA wanted to evict her because of her failure to cure the defaults and because the Chapter 7 trustee rejected the lease as part of the bankruptcy estate.

The PHA asked the court to declare that the Bankruptcy Code’s antidiscrimination provision didn’t apply to a public housing authority lease, allowing it to evict the resident. The antidiscrimination provision of the Bankruptcy Code prevents government entities from discriminating against debtors based on the debtor’s bankruptcy filing.

The bankruptcy court ruled against the PHA and held that a public housing lease was protected because it is a “similar grant” to a license, charter, permit, or franchise, which are protected under the statute. The PHA appealed.

Ruling: A Pennsylvania district court reversed the bankruptcy court’s decision.

Reasoning: The court concluded that a public housing lease doesn’t have the same qualities as the other listed protected rights in the Bankruptcy Code’s antidiscrimination provision and, therefore, the provision didn’t apply. If Congress intended a lease to be considered in the provision, it would have explicitly included leases in the language, but it did not.

Also, the court ruled that an eviction wouldn’t be discriminatory because the Chapter 7 trustee rejected the lease, which by operation of law places the “asset” outside of the bankruptcy estate but still in default. The resident failed to pay the debt or cure the default once the lease was returned to her “possession.” The resident continued to be in default of the loan, and the court stated that the PHA may evict the resident based on the breached contractual agreement.

Even if she’s evicted, the court believes the resident may still start anew and seek out housing that better suits her income. To allow her to continue under a breached lease that’s in default indefinitely because she has been through Chapter 7 bankruptcy would impinge on the PHA’s rights to its property.

• Housing Authority of the City of Pittsburgh v. Smith, December 2014