By Cara O'Neill, Esq.
Determining Whether the Debt is Dischargeable
Since security deposits are not listed as “non-dischargeable” under Bankruptcy Code 11 USC §523, the landlord will not be responsible for returning the security deposit after filing bankruptcy. Because of this, the only way the tenant will recover the deposit is if there are enough assets in the bankruptcy estate to pay the debt.
Determining the Priority of the Debt
Debts are not all treated alike in bankruptcy, and fortunately, a security deposit is paid before certain other debts. Pursuant to Bankruptcy Code 11 USC §507, bankruptcy claims are paid in the following order:
- Secured claims
- Unsecured priority claims, such as security deposits
- Unsecured, non-priority debts
Since security deposits are classified as unsecured priority debts, they are paid after secured claims but before unsecured, non-priority debts, such as credit card debt. Therefore, if estate assets exist, the tenant may recover the security deposit. Often times, however, estates do not have assets to distribute to creditors. If this is the case, the tenant loses the deposit.
How to Claim Payment of a Security Deposit
After the §341 Meeting of Creditors, the bankruptcy trustee declares whether the case is an “asset” case or a “no asset” case. In asset cases, the creditor must file a Proof of Claim asking for payment of the debt. The form can be found on the bankruptcy court’s website. The priority box for Bankruptcy Code 11 U.S.C. § 507 (a)(7) should be selected and proof of the debt attached.
In Cases of Fraud
Debts can be disputed and potentially omitted from discharge if fraud is involved. For this to occur, however, the creditor must ask the court for a fraud determination by filing an “adversary proceeding.” An adversary proceeding is like any other lawsuit in that the litigants conduct discovery, attend status conferences, and if a settlement is not reached, the case is decided at an evidentiary hearing. Unfortunately, like all lawsuits, pursuing an adversary proceeding is expensive and will likely cost more than the actual security deposit.
Cara O’Neill, Esq. is an author and accomplished trial attorney who has served as an Administrative Law Judge and taught undergraduate and graduate legal courses for a well-known university.
She currently maintains a bankruptcy practice in Roseville, California at the Law Offices of Cara O'Neill</a>. Information about her law practice and writing can be found on her website at caraoneill.com.
United States Courts: Discharge in Bankruptcy
Legal Information Institute: Bankruptcy Code 11 USC §523 – Exceptions to Discharge
Legal Information Institute: Bankruptcy Code 11 USC §507 – Priorities
National Association of Bankruptcy Trustees: What are the Duties of a Bankruptcy Trustee?
United States Courts: Discharge in Bankruptcy: Bankruptcy Forms
United States Bankruptcy Court District of Nevada: Adversary Proceeding Filing Requirements
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