What Happens to Leases and Contracts in Chapter 7 Bankruptcy?

In Chapter 7 bankruptcy, you must make decisions about your executory contracts or unexpired leases—like apartment leases, car leases, or service contracts—because they involve ongoing commitments. Some you'll want to keep; however, sometimes they're also valuable for your creditors.

Because both you and your creditors might want to benefit from the agreements, bankruptcy law has rules to ensure that contracts and leases are handled in a manner that's fair to both you and your creditors. Learn about your options, as well as when the bankruptcy trustee will override your decision and "assume" or "reject" your contract or lease for the benefit of creditors.

What Are Executory Contracts and Unexpired Leases in Chapter 7 Bankruptcy?

An executory contract is a contract in which both parties still have significant obligations to fulfill. An unexpired lease is a lease that is still in effect when you file for bankruptcy. Unlike other debts that you can simply discharge, you'll decide to continue with the agreement or lease and "assume" it, or end it by "rejecting" it. The Chapter 7 bankruptcy trustee will also have a say in this decision.

Common examples of executory contracts and unexpired leases include:

• residential house and apartment leases
• commercial real estate leases
• car leases
• personal property leases, such as office equipment
• service business contracts
• contracts for the sale of real estate, and
• copyright, patent, and franchise agreements.

The Trustee's Role: Deciding the Fate of Your Agreements

The Chapter 7 bankruptcy trustee administers your bankruptcy case—not a bankruptcy judge—and is responsible for reviewing your bankruptcy paperwork, verifying your identification, and most importantly, finding assets for creditors.

This matters because in Chapter 7, you're allowed to keep property necessary to maintain a household and employment. Your state determines the property you can keep and those decisions are found in your state's bankruptcy exemptions. However, your creditors are entitled to any nonexempt property you might own, and the trustee sells or "liquidates" nonexempt property for the benefit of your creditors.

Executory contracts and unexpired leases can be property the trustee liquidates (although it's unusual). Therefore, the truess must decide whether to assume or reject your executory contracts and unexpired leases in Chapter 7.

When Must the Trustee Assume or Reject?

The trustee has 60 days from the date of the bankruptcy filing to decide whether creditors can benefit from "assuming" or taking over contracts and leases. However, the time can be extended to 120 days.

How Does the Trustee Decide to Assume or Reject?

The trustee will analyze your leases and executory contracts to determine if they have any value for your bankruptcy estate and creditors. Here's what the trustee will consider.

• Assume. If creditors will benefit from the executory contract or unexpired lease, the trustee will file a motion with the bankruptcy court within the time allowed. For example, suppose you have a valuable business contract that the trustee can sell or assign to another party. In that case, they might assume it to generate funds. Most consumer leases and contracts, such as apartment or car leases, are typically not assumed by the trustee because they don't offer a direct benefit to the creditors and aren't easily assignable.
• Reject. In a consumer (as opposed to a business) case, the trustee typically rejects the lease by allowing the time to expire. The rejection terminates the agreement, allowing the creditor to file a claim if funds are available for distribution.

Your Options as the Debtor: Making Choices About Your Agreements

The bankruptcy trustee makes the initial decision to assume or reject your executory contracts and unexpired leases. However, after the time for the trustee to act has expired, you, as the debtor, also have important choices to make.

Completing the Statement of Intention

Your first step will be to file a form called a Statement of Intention for Individuals Filing Under Chapter 7 ("Statement of Intention"). On this form, you inform creditors and the court whether you want to assume or reject each executory contract and unexpired lease.

How Long Do I Have to File the Statement of Intention?

You don't have to file the form immediately. You have either 30 days from the filing date or by the first date set for the 341 meeting of creditors (the hearing all filers attend), whichever is earlier.

Tip. Many people file the Statement of Intention along with the other necessary forms to initiate a Chapter 7 case rather than waiting 30 days, as it can easily be overlooked. If you don't file it, the automatic stay protecting you from creditors will lift, and the lessor could seize your car.

Should I Assume or Reject?

You'll likely know whether or not you want to assume or reject your leases and contracts on the Statement of Intention. Here's what it usually comes down to.

• You reject the lease or contract. Often, the choice is for burdensome contracts or leases you can no longer afford. You're released from all responsibility. The creditor can file a claim for reimbursement if money is available in your case.
• You assume the lease or contract. You'll likely choose to continue to remain responsible for the ongoing payments and obligations when you want to keep your apartment lease or a car lease. Your lawyer can explain how to proceed with your landlord (most continue accepting payments), but you'll likely need to enter into a new agreement for your car lease.

Tip. If you're behind on payments, you'll be required to "cure" the default when assuming a lease or contract. Plan to pay the amount you're behind in a lump sum. The creditor isn't required to accept a payment plan—and likely won't—but it's possible that the creditor might agree if you can prove you can pay in the future (more below).

Deadlines You Must Meet

Bankruptcy law gives you a limited amount of time to execute a lease or contract assumption. If you miss one of the deadlines, the automatic stay will be lifted. Here are the deadlines you must meet.

• File the Statement of Intention. You'll have 30 days from the filing date or until the first date set for the 341 meeting to file the Statement of Intention. (11 U.S.C. § 521(a)(2).)
• Execute your decision. You have 60 days after the bankruptcy filing to execute your stated intention. (11 U.S.C. § 365.)

60-Day Rule for Vehicle Leases

Both deadlines are critical when dealing with an auto lease. If you miss one, the lessor can repossess the car. Here's what you might want to consider doing when you want to affirm a vehicle lease:

1. File the Statement of Intention. If you know you want to keep a leased vehicle, don't wait 30 days to file the form. Consider filing it with your paperwork. If you decide to wait, don't forget to file it by the deadline.
2. Contact the lessor. You should contact the lessor to initiate the assumption process.
3. Pay or "cure" missed payments. If you're behind, you'll need to catch up immediately, unless the lessor agrees to a payment plan. Keep in mind the lessor is likely to refuse the assumption if you're behind.
4. Complete the paperwork. You'll have 60 days from the bankruptcy filing date to complete the assumption. If the lessor agrees to the assumption, expect to sign a new contract obligating you to the prior terms as if the bankruptcy hadn't occurred, or any new terms you agree on.

Keep in mind that the lessor isn't required to agree with the assumption. If the lessor wants the vehicle back, you'll need to surrender the car in the Chapter 7 case. Additionally, some jurisdictions have different rules that you must adhere to. A bankruptcy lawyer can explain the requirements and assist you with the process.

Real-World Scenarios: Applying the Rules

It's rare for an individual in a nonbusiness bankruptcy case to need to be concerned about the trustee assuming an executory contract or lease. For instance, it would be unusual for you to negotiate a car lease so good that it left room for a trustee to make money on it. It's not something that typically happens.

However, suppose you have a business contract that is quite valuable to your company, and the trustee recognized it when reviewing your paperwork. In that case, the trustee would be more likely to assume this contract if it didn't contain a provision prohibiting it from being assigned or sold to someone else. In all situations, the trustee must overcome multiple hurdles.

Paperwork and Next Steps: Your Bankruptcy Forms

The information about your executory contracts and unexpired leases, and your intentions regarding them, must be reported on specific bankruptcy forms. The primary forms where you will disclose information about your leases and contracts include:

• Schedule G: Executory Contracts and Unexpired Leases. Schedule G is the primary form used to list all executory contracts and unexpired leases when filing for bankruptcy. For each agreement, you will provide details such as the name and address of the other party, the nature of the contract or lease, and the date it was entered into.
• Schedule A/B: Property. While Schedule G is specifically for leases and contracts, if the agreement involves personal property (like a car lease or rent-to-own furniture), you'll also list the property on Schedule A/B.
• Schedule E/F: Creditors Who Have Unsecured Claims. If you reject a lease or contract, the other party to the agreement may have a claim against you for damages resulting from the termination. This claim would typically be listed as an unsecured claim on Schedule E/F.
• Statement of Intention for Individuals Filing Chapter 7. As discussed above, you must formally state your intention to assume or reject each executory contract and unexpired lease on the Statement of Intention form.

You'll find detailed instructions in How to Get and File Bankruptcy Forms.

Should You Seek Legal Advice?

Bankruptcy law is complex, and every individual's financial situation and specific agreements are unique. If you're considering Chapter 7 and have executory contracts or unexpired leases, a lawyer can:

• Review leases and contracts, and explain your options regarding assuming or rejecting them.
• Ensure your bankruptcy paperwork is completed and filed within deadlines.
• Appear with you in court and assist with any issues that might arise.

Consulting with a bankruptcy lawyer is a good way to ensure you discharge qualifying debts while protecting the property you'd like to keep.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms can be found on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.