Leases and Contracts in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, you can continue with ongoing leases and contracts, or end them.
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When you file for Chapter 13 bankruptcy you are required to disclose all executory contracts and unexpired leases that you are a party to. The trustee can decide whether to agree to perform (assume) or refuse to perform (reject) the duties required under the contract or lease. If the trustee decides to reject the contract or lease, you have up until your confirmation hearing to assume or reject. A contract or lease that is not assumed by confirmation is considered rejected.
What are Executory Contracts and Unexpired Leases?
An executory contract is an agreement between two parties where performance is due at the time the bankruptcy case is filed. In other words, both parties still have duties to perform before the terms of the lease or contract expire. If either one of the parties has already performed all of the required duties the contract is not considered executory. A lease is unexpired if it has not been terminated and is still in effect when a bankruptcy case is filed.
Some common examples of executory contracts and unexpired leases include:
- vehicle leases
- apartment leases
- land contracts
- equipment leases
- time-share leases
- intellectual property licenses
- business contracts
- real estate leases and,
- cell phone contracts.
Trustee Options for Leases and Contracts in Chapter 13
With certain limitations, the trustee has the authority to assume or reject any contract or lease.
When the Trustee Assumes the Lease or Contract
If the trustee assumes the contract or lease, it means the trustee is agreeing to perform your duties under the contract. This means that the trustee must “cure” (makeup) any default that exists under the contract or lease. For example, if you are behind on an automobile lease payment, the trustee must make up any missed payments.
When the Trustee Rejects the Lease or Contract
If the trustee rejects the contract or lease, it means the trustee is refusing to perform your duties under the contract or lease. A trustee will only assume a contract or lease if doing so will benefit the bankruptcy estate.
Executory contracts and unexpired leases rarely have any value and are often rejected by the trustee. The trustee’s decision to assume or reject a contract or lease must be approved by the bankruptcy court.
(To learn more about the role of the Chapter 13 bankruptcy trustee.)
Your Options for Leases and Contracts in Chapter 13
If the trustee does not assume the contract or lease, you may assume or reject it at any time before your confirmation hearing. Unless the bankruptcy judge has agreed to extend the deadline, if you don’t assume the contract or lease by confirmation, the court will considered it to be rejected.
What Happens If You Assume the Lease or Contract?
The decision to assume means that you must perform all of your obligations under the contract or lease. If you are behind on payments or otherwise in default under the contract or lease you must quickly cure the default and show that you will not default in the future.
What Happens If You Reject the Lease or Contract?
If you reject the contract or lease you are relieved of your obligation to pay but you must also surrender the property that is the subject of the contract or lease. For example, if you reject an automobile lease you may stop making the monthly payments, but the creditor can repossess the vehicle. The creditor can also file an unsecured claim in your case for any past due payments or damage to the vehicle.