What happens to a tenant’s security deposit after the tenant files bankruptcy? If rent is owned, can the landlord apply the deposit to unpaid rent?
An informal poll of area Bankruptcy Lawyers reveals a belief that a security deposit can be used as a set- off against both pre-petition damages and lease termination damages under Section 553 of the Bankruptcy Code. The set off is subject to mitigation by the landlord, including releting the premises. The safest process is to have a court grant relief from stay before applying the security deposit; but this procedure may cause a debtor to file an objection. Right or wrong, most Landlords simply keep the deposit.
Some attorneys also argued that Landlord can assert a “secured claim” up to the amount of the security deposit.