Leases and Contracts in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, you can continue with or terminate existing contracts or leases.

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If you file for Chapter 7 bankruptcy, usually you can decide if you want to continue with existing leases or contracts (called assuming the lease or contract) or end the lease or contract (called rejecting the lease or contract).

Duty to Disclose Leases and Executory Contracts

If you file for Chapter 7 bankruptcy, you must disclose whether or not you are a party to any leases or executory contracts that have not expired. You do this on Schedule G of the bankruptcy petition. In addition, on the Statement of Intention, you tell the court what you plan to do with the lease or contract (assume or reject).

What Are Executory Contracts and Expired Leases?

An executory contract is a contract with conditions that remain to be fulfilled by both parties. An unexpired lease is a lease that has not yet run out -- it's still in force. Both executory contracts and leases impose continuing obligations on the parties involved until the contract expires.

Examples of executory contracts and unexpired leases include:

  • vehicle leases
  • apartment or home rental agreements
  • business leases and business rental agreements
  • service contracts
  • business contracts
  • time-share contracts or leases
  • contracts of sale for real estate
  • future homeowners’ association fee requirements, and
  • insurance contracts.

Options in Chapter 7: Assume or Reject the Lease or Contract

In most instances in Chapter 7 bankruptcy, the debtor may choose to assume or reject the lease or contract. In some cases, the Chapter 7 trustee might decide to assume the lease or contract for the benefit of the bankruptcy estate. This rarely happens in Chapter 7 bankruptcies, however.

Assuming the Lease or Contract

If you assume the lease or contract, you will continue to be bound by the terms of the contract and will be required to perform your part of the agreement. Likewise, the other party to the agreement remains bound by the lease or contract obligations.

Before you assume a lease, be sure to consider the condition of leased equipment or property. For example, if you choose to assume a car lease, you will have to continue making lease payments, pay over-mileage fees if necessary, and cover the cost of repairs if the car is damaged. If you have a year left of the lease period and are already over the mileage limit, rejecting the car lease might save you thousands of dollars in over-mileage fees when the lease ends.

Rejecting the Lease or Contract

If you choose to reject the lease or contract, your obligations under the agreement end. The same is true for the other party to the agreement. If you owe money under the agreement, in most cases this will be discharged at the end of your Chapter 7 bankruptcy.

by: Omar Badr

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