What happens if you have a lease or contract that is still in force when you file for Chapter 13 bankruptcy? There are several options which depend, in part, on what the trustee wants: The trustee takes over the lease or contract, you continue with the lease or contract, or you get out of it altogether.
(To learn more about Chapter 13 bankruptcy and how it works, see our Chapter 13 Bankruptcy area.)
What is an Executory Contract or Unexpired Lease?
The bankruptcy code talks about executory contracts and unexpired leases. “Executory” means the contract is still in force—that is, both parties are still obligated to perform important acts under it. Similarly, “unexpired” means that the contract or lease period hasn’t run out—that is, it is still in effect. Common examples of executory contracts and unexpired leases are:
- car leases
- residential leases or rental agreements
- business leases or rental agreements
- service contracts
- business contracts
- time-share contracts or leases
- contracts of sale for real estate
- personal property leases, such as equipment used in a beauty salon
- copyright and patent license agreements
- leases of real estate (surface and underground) for the purpose of harvesting timber, minerals, or oil
- future homeowners’ association fee requirements
- agreements for boat docking privileges, and
- insurance contracts.
Trustee Options: Assume or Reject the Lease or Contract
The trustee has until the confirmation hearing on your plan to decide whether an executory contract or unexpired lease should be assumed (continued in force) as property of the estate or rejected. As a general matter, most leases and contracts are liabilities and are rejected by the trustee.
Your Options if the Trustee Rejects the Lease or Contract
If the trustee rejects the contract or lease, you can assume or reject the contract or lease in your Chapter 13 plan. If your plan rejects the lease or contract, you and the other parties to the agreement are cut loose from any obligations, and any money you owe the creditor will be treated as an unsecured debt in your plan, even if the debt arose after your filing date.
For example, say you are leasing a car when you file for bankruptcy. You want out of the lease. The car dealer cannot repossess the car until the trustee rejects the lease, or you reject the lease in your plan. During that period, technically you can use the car without paying for it (although you will have to make “adequate protection” payments equal to your monthly payments, unless you have sufficient equity in the car to cover the value it will lose in depreciation while you’re using it; see In re Singer, 368 B.R. 435 (E.D. Pa. 2007)).The payments you don’t make during this period will be treated as an unsecured debt just as if they were incurred prior to your bankruptcy.
Bankruptcy law has special rules for executory contracts related to intellectual property (copyrights, patents, trademarks, or trade secrets), real estate, and time-share leases. If you are involved in one of these situations, discuss it with your lawyer.
Want to learn more about bankruptcy? Check out our bankruptcy resource center.