What happens when a self storage customer goes bankrupt?

The recession during the last few years has seen record-breaking numbers of people and businesses declare bankruptcy after being overwhelmed by the amounts they owe. Individual bankruptcies in particular have skyrocketed; according to an article in the Evening Standard, 2010 saw a record high of 135,089 people forced to throw in the towel on their debts.

Bankrupt customers are annoying for any business to have to deal with; but how does it work in the self storage industry, where a company might be suddenly left with a unit full of a bankrupt’s possessions instead of the money they are owed?

The answer can be surprisingly complicated, and depends largely on the individual situation involved.

Self storage: Individual bankruptcies

Most self storage companies have a mixture of both individual and business clients, although this distinction can become rather blurred, for example in the case of self-employed tradesmen who rent a unit for storing their tools, but also keep a few personal belongings in there as well.

From a legal point of view it simply depends upon whose name is on the contract, so someone who’s just put their own name is counted as an individual client, even if they were using the unit to store items which belonged to their business (although these would still be regarded as assets belonging to the business for asset-disposal purposes).

When an individual, rather than a company, goes bankrupt, the process for the self storage firm is fairly straightforward. The people to whom the person going bankrupt owes money are referred to as their creditors. These are divided into two categories: secured creditors and unsecured creditors.

Secured creditors are people who hold a security in return for the debt of the person who owes them money. In the case of self storage companies, this is the possessions which the customer was storing with them, as most self storage rental agreements contain a clause which says that the company can deny them access to their goods in the event of fees being late- or un-paid.

Self storage companies are usually a particular type of secured creditor, as their contract with the customer gives them a ‘lien’ – a legal status that essentially gives them a right of ownership to the client’s stored goods if fees aren’t paid within a certain period.

The lien is very important to the self storage company, because it means they have the right to sell the client’s goods in the event that they go bankrupt and are incapable of paying the fees they owe. If this status didn’t exist, the stored goods would be considered part of the customer’s overall assets, and would have to be sold to pay off the creditors in order of priority, determined by the insolvency practitioner, so the self storage company might well receive less of the money they are owed from their sale.

Therefore, in most cases the self storage company has to submit an application to the person conducting the bankruptcy proceedings claiming they have a lien; then, once this has been recognised, they are free to sell the goods.

However, if this still doesn’t cover their entire debt, then the self storage company can submit an additional claim – although there is an order of priority amongst creditors for determining who should be paid what from the money raised by the disposal of the customer’s other assets, and in what order; there is no guarantee they will receive anything.

As the money raised in this manner frequently isn’t enough to cover all the debts of the person going bankrupt, the self storage company may not receive enough money to fully reimburse it for its loss.

Self storage: Business bankruptcies

When a company that is storing goods in a self storage centre goes bankrupt, much the same procedure applies. Again, the lien mechanism is the most straightforward way for the self storage company to collect its unpaid rent, and often the only one for the reasons given above.

The title of the person conducting the bankruptcy varies depending on the type of company involved; a ‘trustee’ disposes of the assets of sole traders, while a ‘liquidator’ fulfils this role for incorporated firms.

The Official Receiver has a responsibility to contact all known creditors within 12 weeks of the bankruptcy proceedings beginning; however, if a self storage company wishes to make a claim but hasn’t been contacted, they need to write to the Official Receiver submitting their claim. The trustee or liquidator will then send them a proof of debt form, which needs to be completed by a date specified on the form, otherwise their claim cannot be considered.

As with individuals, a self storage firm is likely to receive the bulk of the money it is owed by bankrupt business customers from the sale of their stored goods; this is potentially quite valuable, as it may well include stock and/or supplies.

Where it gets more complicated

Unfortunately, there is one issue which can complicate this situation quite a bit. Many business customers of self storage centres, especially smaller businesses, use their self storage units for storing an archive of company records.

In the event that such a customer goes bust, a file archive obviously has almost no resale value. A self storage firm might be tempted to simply cut their losses and dispose of the files, so they can make the space vacant again.

However, this is not what they should do – the records are likely to be needed by the trustee or liquidator conducting the bankruptcy, in which case the lien doesn’t apply and the company has to return them to the relevant authorities.

In such cases, the self storage company then has no option but to submit a claim as a creditor, which means engaging in a chancy business which will not necessarily end with them receiving any money.

Such cases are likely to be a real headache for self storage companies, so it’s best from a bankruptcy point of view if business customers are storing valuable goods and stock rather than just their old records.

One Response to “What happens when a self storage customer goes bankrupt?”

1. Alan Stephenson says:

   June 10, 2011 at 11:47 pm

   This is very interesting. I think the lein clause on the contract is a great idea and I will look into it for my busines. What I have found is that invariably although clients pay in advance there are the odd ones that start to accumulate arrears. You can bet your bottom dollar that the contents of their storage is total rubbish and your going to be stuck with it. I’m sure there is an element of customers who use self storage as a form rubbish disposal.
   We must have at least 30 units of worthless furniture and effects which is very costly to dispose of. Our problem is that by the time we have gone down the legal route the storage arrears have built up even more. If the Lein clause can solve this then that could save us a major headache.
   Great article as usual !