If you have an unexpired lease or executory contract when you file for Chapter 7 bankruptcy, the bankruptcy trustee may "assume" or terminate the lease or contract. Read on to learn what it means to assume or terminate a lease, how likely it is that the trustee will assume your lease, and what happens if you want to terminate the lease.
What is an Executory Contract or Unexpired Lease?
“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.
The Trustee's Options: Assume or Terminate the Lease
The trustee has 60 days after you file for bankruptcy to decide whether an executory contract or unexpired lease should be assumed (continued in force) as property of the estate or terminated (rejected).
If the lease or contract would generate funds for your unsecured creditors, then it will be assumed; otherwise, it will be rejected. As a general matter, most leases and contracts are liabilities and are rejected by the trustee. However, you have the right to assume a lease on personal property (for instance, a car lease) on your own, as long as you give the creditor written notice and the creditor agrees. You provide this written notice in the Statement of Intention which you file with your bankruptcy papers.
When the Trustee Might Assume a Lease
As a general rule, people filing Chapter 7 bankruptcies are not parties to leases or contracts that would likely add value to their bankruptcy estates. This isn’t an absolute rule, however. If the trustee could sell a lease to someone else for a profit (because you’re paying less than market rent, for example), the trustee might assume the lease and assign it for a lump sum that could be distributed to your creditors. But this would be highly unusual. Trustees aren’t looking for ways to put you on the street or penalize you for getting a great rent deal.
If You Want to Terminate the Lease or Contract
It’s also possible that you’ll want to get out of a contract or lease, such as a residential or an auto lease or a time share you can’t afford. Be sure to state at the bankruptcy meeting or even on your papers that you would like the trustee to terminate the agreement. But remember this is up to the trustee to decide.
What Happens if the Lease or Contract is Terminated?
If the lease is assigned or terminated or the contract is terminated, you and the other parties to the agreement are cut loose from any obligations, and any money you owe the creditor will be discharged in your bankruptcy, even if the debt arose after your filing date.
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 terminates the lease, which normally must occur within 60 days of when you file. During that 60-day period, you can use the car without paying for it. The payments you don’t make during this period will be discharged as if they were incurred prior to your bankruptcy.
Intellectual Property, Real Estate, and Time-Share Leases
Bankruptcy law has special rules for executory contracts related to intellectual property (copyright, patent, trademark, or trade secret), real estate, and time-share leases. If you are involved in one of these situations, see a lawyer.