Baselane Blog

How to Collect Unpaid Rent

Saad Dar

Writer and Editor at Baselane 4 February 2022 5 Min Read
How to Collect Unpaid Rent

In a perfect world, all landlord-tenant agreements would end in a civil, straightforward manner, with all outstanding debts duly paid. However, as we are all aware, the world that we occupy is far from perfect and there are many situations where landlords may find themselves with a tenant who has fled their unit early without paying rent. If you’re a landlord who has found yourself with unpaid rent, this article is for you.

In this Baselane guide, we’ll provide some options that landlords have if they’re looking at how to collect any unpaid rent that arises from a tenant breaking a lease or moving out unexpectedly.

Of course, every situation is different, so if you’re a landlord that is finding yourself in this predicament it’s always best to consult with your experts to find the right advice that matches your specific scenario. However, we hope this article will paint a good picture of the different options that are available to you.

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1. Try to Collect the Rent

While this option may seem a bit too obvious, it’s a worthwhile place to start. One of the best ways to ensure on-time rent payments is to establish both a rent collection policy and a pattern of clear communication with your tenant from the onset.

A good rent collection process includes details about how much rent is due when rent is due (the 1st of the month, 15th of the month, etc), how rent should be paid (Do you accept rent in cash? Do you require post-dated cheques? What about money orders?), and what late fees will be added if rent isn’t paid on time.

As soon as a part of this rent agreement has been broken, like late payment of rent, for example, you should inquire about the status of your rent payment with your tenant.

In some cases, you may be able to uncover a late payment or work out a payment plan. However, if your tenant fails to provide you with a solution and starts to field your calls, or if they have already begun the move-out process without alerting you, you may need to move on to stronger courses of action.

If you’re a landlord who’s struggling with keeping track of the tenants that still owe you outstanding rent, first of all, know you’re not alone. It’s genuinely hard to decipher who has paid you and when at times.

The good news is that the act of landlording is finally entering the 21st century with tools like Baselane’s automated rent collection platform. This tool not only gives your tenants the flexibility to pay however they’d like, but also lends you a bird’s eye view of all of your payments. Learn more about automated rent collection.

2. Take the Rent Out of Your Security Deposit

In some cases, you may be able to use your tenant’s security deposit to cover the costs of unpaid rent.

In fact, the very point of the security deposit is to provide the equivalent of one or two months’ rent. However, be careful, as this isn’t always the case, so make sure to check with your local state laws.

The point of the security deposit is to cover expenses that come up at the time of exiting a unit, including the costs of unit repairs and unit cleaning.

Depending on the state that you operate in, you may be able to recoup the equivalent of one or two months’ rent as a security deposit, with two months generally being the maximum.

Some states may also dictate when the deposit can be returned and may require landlords or property owners to pay their tenants interest on the security deposits.

These unit repairs must include considerable damage to the unit that is noted at the time of move-out inspection and can’t include things like normal wear and tear.

As security deposits are intended to cover a tenant’s neglect to honor the terms of your rental contract, in most cases it’s possible to use the security deposit to cover the costs associated with unpaid rent. Even if this practice is legal in your area, it may not be sufficient.

For example, if you have raised the rent at any time during your tenancy, then the security deposit may no longer cover the costs of rent. Additionally, the two months’ worth of rent payments might not quite cover the amount of rent owed. You may need to look at more serious options if this is the case.

Keeping a security deposit in a landlord bank account can have substantial benefits, such as low fees and cashback. Consider utilizing these landlord-tailored tools to improve your financial situation while straightening other issues out.

3. Small Claims Court

If you are unable to recover unpaid rent through your security deposit, your next stop may be small claims court. This usually happens when a tenant breaks a lease by leaving abruptly or leaves a casual rental agreement without giving proper notice.

In many cases, if the tenant has moved away, they will not show up in court and the landlord will win by default. All landlords will need to do in this situation is show up with their lease in hand.

If your tenant leaves a unit early and breaks their lease, in many cases a landlord will have the responsibility to mitigate their losses to the best of their ability.

This would include leaving at any time during a 12-month lease or leaving without giving proper notice on a month-by-month lease (where proper notice is usually 30 days but can vary). This also means that landlords are expected to attempt to re-rent the units to the best of their ability. However, they may be able to include the costs of finding a new tenant in their claim.

If a judge finds that a tenant fled an uninhabitable unit, the landlord is not likely to win their case. This is because landlords forfeit their right to rent if they are unable to provide a rental unit that is fit for human habitation.

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4. Collections Services

In some cases, a landlord may find the process of filing in small claims court is not worth their time or effort. Or, they may find it difficult to locate the new address of a previous tenant.

In both cases, it may make sense to use a collection service. These agencies work by charging an up-front payment in return for rent collection.

Alternatively, you can also hire a collection agency or a debt collections agency.

5. Debt Reporting

Another option is to report your former tenant’s rent debt to a credit bureau. While this option will not directly help you uncover rent immediately, it can motivate them to re-pay the rent in the long run.

Here’s how it works: you can report your former tenant’s debt to one of the three major credit bureaus.

To have these negative reports removed from their report, your tenant would have to satisfy the balance by paying the rent owed.

A negative credit score is a severe disadvantage, so this may be motivation enough for your former tenant to make amends.

The Bottom Line: Collecting Unpaid Rent

The collection of unpaid rent is not a situation that any good landlord wants to find themselves in, but it’s an unfortunate fact of life.

Understanding the tenancy laws of your jurisdiction goes a long way in choosing how you can best react when these stressful situations arise.

You don’t need to handle the trials and tribulations of being a landlord alone. Using Baselane as your property management software can help you with the many responsibilities that come along with managing rental properties, including automated rent collection.

Is unpaid rent tax deductible?

The short answer to this is no, unpaid rent is not tax deductible. Although unpaid rent is a debt owed to you by your tenant, it’s not deductible as a bad debt.

The reason behind this is that the IRS requires you to only deduct lost income if the income was forecasted (i.e., reported in advance). Most landlords operate on a cash basis, meaning that they report the rent as it’s paid. They don’t report unpaid rent on their tax returns, therefore it is not deductible.

Can a deposit be used for unpaid rent?

Yes, in many cases a security deposit can be used to cover unpaid rent. However, this will depend on the state that you operate in, so make sure to carefully check all local laws.

Also, note that many states limit the amount of security deposits that you can ask for to one or two months.

In many cases, this will not be sufficient to cover the costs of unpaid rent, especially if the unit also has damage.

Can a landlord sue for unpaid rent?

Yes, a landlord can sue for unpaid rent, and in many cases this is the exact course of action that a landlord will take.

Taking a tenant to court for unpaid rent does not usually require a landlord and can be handled within small claims court. In many cases, a court judgment will grant their ruling in the landlord’s favor provided the landlord is able to show proof of a lease agreement. If the landlord was found to fail at providing safe and inhabitable lodging, they may not be able to recoup unpaid rent.

Can a landlord sue for unpaid rent without a lease?

It depends. A landlord can ask for unpaid rent from a tenant who was on a month-by-month lease, who has also moved out without giving notice.

For the case of a verbal lease, there is a chance that your lease might be legally binding, as long as you can prove the existence of a rental agreement.

However, this might not always be the case, and it’s always best that you consult a lawyer to navigate the particulars of your situation.

Saad Dar

Writer and Editor at Baselane

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