What Happens to Leases and Contracts in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, the trustee can assume or terminate unexpired leases or executory contracts. Learn more.

Updated By , Attorney

If you have an unexpired lease or executory contract when you file for Chapter 7 bankruptcy, the bankruptcy trustee assigned to administer your case might "assume" the lease or contract if it's valuable. If not, you'll be free to decide whether you'd like to continue under a personal property lease (assume it) or discharge (wipe out) your obligation in bankruptcy.

In this article, you'll learn what it means to assume a lease and how likely it is that the trustee will assume your 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. 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 include:

  • car leases
  • residential leases or rental agreements
  • business leases or rental agreements
  • service contracts
  • business contracts
  • 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 harvesting timber, minerals, or oil
  • agreements for boat docking privileges, and
  • insurance contracts.

You'll list all executory contracts and leases on official bankruptcy form Schedule G: Executory Contracts and Unexpired Leases. You'll also list any associated property on Schedule A/B: Property and any related debt on Schedule E/F: Creditors Who Have Unsecured Claims. (Learn more in How to Fill Out Bankruptcy Forms.)

The Trustee's Options: Assume or Reject the Lease

The Chapter 7 bankruptcy trustee has 60 days after you file for bankruptcy to decide whether to assume (continue in force) an executory contract or unexpired lease as part of the property of the bankruptcy estate. If the lease or contract would generate funds for your unsecured creditors (creditors whose debt isn't secured by collateral), and the court agrees that it should be assumed, then the trustee will assume it; otherwise, after 60 days elapses, it will be deemed rejected.

As a general matter, the trustee rejects most leases and contracts because they don't have any value to the creditors (more below) or because the contract contains language prohibiting a transfer of interests.

When the Trustee Might Assume a Lease

As a general rule, people filing for Chapter 7 bankruptcy aren't involved in 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.

How to Assume a Personal Property Lease

If the trustee rejects a lease for personal property, you'll have the right to assume it on your own, as long as you give the creditor written notice and the creditor agrees. You provide this written notice on the Statement of Intention for Individuals Filing Under Chapter 7 form which you file with your bankruptcy papers.

It's also possible that you'll want to get out of a personal property lease, such as an auto lease you can't afford. On the same paperwork, you'll indicate that you will not assume the lease by checking the appropriate box.

What Happens After a Lease or Contract Termination?

After terminating 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 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, and you want out of it. The car dealer cannot repossess the car until the trustee terminates the lease, which normally must occur within 60 days of filing. During that 60-day period, you can use the car without paying for it. The court will discharge the payments you don't make just as if they came due before your bankruptcy.

Meet With a Bankruptcy Lawyer

Like many things in bankruptcy, understanding what will happen to your property—including leases and contracts—can be confusing. Consider speaking to a local bankruptcy attorney before deciding whether bankruptcy is right for you.

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