When a person who does not own a home, but instead rents the apartment or home he or she lives in, files for bankruptcy, the assets which must be listed in the bankruptcy papers will usually include a landlord security deposit. The reason the landlord deposit must be listed is that it still belongs to the bankruptcy debtor, even though it is in the possession of someone else (the landlord), and even though it could be taken by the landlord if the debtor ends up owing money to the landlord at the end of the lease.
Section 541 of the bankruptcy law says that any money or property the debtor owns, no matter how tenuously, is part of the bankruptcy case, subject to being taken by the trustee unless it can be claimed exempt. This includes landlord security deposits.
In states which allow use of the federal bankruptcy exemptions, the landlord deposit normally can be claimed as exempt from the trustee by using the “wildcard” exemption contained in section 522(d)(5). But what happens if the debtor has used up the $11,200 wildcard exemption on other property, or lives in a state which has no exemption for landlord deposits? Can the debtor be forced to pay the amount of the landlord deposit to the trustee?
Because the trustee only acquires whatever rights the debtor had in the money or property at issue, the answer is probably not. The only right the debtor had in the landlord deposit, on the day the bankruptcy was filed, was the right to get the deposit back someday in the future when the lease ends. This right also is contingent on the landlord deciding to return the deposit after verifying there are no damages to the leased premises, and that there is no other money owing to the landlord for any other reason.
Therefore, the trustee only succeeds to the debtor’s right to maybe get this money back from the landlord someday, possibly years in the future. The trustee will have to keep the case open if she ever desires to see this money. Furthermore, the trustee may never get the landlord deposit, because the landlord might decide to keep it based upon claimed damages to the leased premises.
Because the debtor does not have possession or control of the landlord deposit, the trustee should not be able to file a turnover motion against the debtor for the deposit. This is because the debtor only has to give the trustee what he possessed on the day the bankruptcy was filed (and which cannot be claimed exempt). In the case of a landlord deposit, all the debtor had on the day the bankruptcy was filed was a right to get the deposit back later someday if he or she is lucky.
What this means is that a landlord deposit should not be a significant problem for a bankruptcy debtor, even if he or she cannot claim it exempt.
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Last modified: January 25, 2008