A Guide to Leases in Bankruptcy

What is a lease?

The two most common types of leases for consumers are real property leases, where you rent your home, or personal property leases, most commonly for cars. Let's start by looking at some terminology first:

Lessor: The person or business that is allowing you to use their property in exchange for a monthly fee. If you are leasing your residence, your landlord is the lessor. If you are leasing a vehicle, the bank that you are sending your payments to is the lessor.

Lessee: The person that is paying money in exchange for the use of certain property. If you are leasing your residence, you are the lessee or tenant.  

Lease: The agreement between the lessor and the lessee about what it is the lessee is renting from the lessor. It's what your landlord asks you to sign before you move in.

Lease payment: The monthly fee you pay to the lessor (landlord); also known as "rent" for real property leases.

What's not a lease?

If you are financing your car, or have a mortgage for your house, you are not in a lease. This is true even though it may feel like you are because you have to make monthly payments. The critical difference is the ownership of the asset. In a lease agreement, the lessor continues to own the property and merely allows you to use it. When you finance the purchase of a vehicle or a house, you become the owner of the property, not the bank. The bank becomes a secured creditor and when your debt to the bank is paid off, you own the property free and clear. When a lease is paid off because you have made the last lease payment under the terms of your agreement, the property goes back to the lessor. That can take the form of having to move out of your rental home because the landlord did not renew the lease or it can mean giving the car back to the dealership or paying the dealership for the value of the car as of that date and pursuant to the terms of your lease agreement.

Where to disclose your lease on your bankruptcy forms

Since all parties to the lease still have obligations under the lease agreement, this agreement gets listed on Schedule G of your bankruptcy schedules.

You will need to provide information regarding the name and address of your lessor, and state generally what the lease agreement is for. You can simply say car lease and list the car’s make, model and year.

If you want to keep your residential lease.

Your landlord will receive a court notice about your filing because their address is included in your creditor matrix but you're not required to include your residential lease on your Statement of Intentions. and you don't have to notify your landlord directly.

Simply stay current with your lease payments as per the terms of your contract and everything essentially stays the same.

What about rent-to-own?

If you have a rent to own contract where you are slowly purchasing the home by making rental payments, you may already have some ownership interest in the property greater than a typical tenant. In that case, your interest in the real property based on the contract should also be listed on Schedule A/B and claimed as exempt if possible on your Schedule C. This is in addition to listing the lease on Schedule G.

What to do to keep your lease

When you are party to a lease agreement, one of the forms you will be required to file with the bankruptcy court is the Statement of Intentions. In order to keep the lease, go to Part 2, enter the lessor's name and the type of lease you have (this can be the same as what it says on your Schedule G), and check "yes" on the right. By checking “yes,” you are agreeing to “assume” the lease.  

Often times it makes sense to stay in a lease agreement even after a bankruptcy is filed. This is especially true for residential leases where the monthly rent you are paying is in line with the rental market in your area and you wouldn't be able to find a comparable space for less money. The same cannot always be said about car leases, so you should carefully review your lease terms for fees or costs you may have to pay when you complete the lease term and  consider your budget to make sure it's doable on a month to month basis before making the decision to keep the lease.

Knowing whether you can afford the lease payments going forward is very important in making this decision. Remember, when you assume the lease, whether it's a car lease or a residential lease, you will remain responsible for all terms of the lease agreement as though no bankruptcy had been filed. In other words, you assume the responsibilities that come with the lease.

The Statement of Intentions is considered sufficient written notice of your intentions to your lessor and ou should not be required to sign any other documents. Sometimes lessors will send you a separate document that does the same thing - notifies them of your intent - for you to sign.   

Nevertheless, the lessor may still send you a Reaffirmation Agreement, especially for car leases. You do no have to enter a Reaffirmation Agreement in order to assume a lease and should not do so. Sometimes car lessors are confused about this and try to require that you enter a Reaffirmation Agreement. In that case, rather than arguing with the lessor, some folks will enter into a Reaffirmation Agreement and then explain the problem to the judge at the hearing on the Reaffirmation Agreement.

What to do if you are not current with your lease payments when your Chapter 7 bankruptcy is filed

Car or other personal property lease

Generally speaking, if you are able to bring your lease payments current relatively quickly after your bankruptcy case is filed, you should be able to assume the lease.  However, that is not guaranteed as the lease agreement will give the lessor certain rights upon default and it will be up to them to decide whether and how to enforce the default terms.

Residential real property

If you are behind on your rent when your bankruptcy case is filed, the landlord has to stop any collection actions or eviction proceedings that may have been started. The automatic stay protects you from that. However, in order to stay in the lease, you will be required to cure or catch up your rent. How quickly that has to be done is not specified in the Bankruptcy Code, but it's a safe bet to say your landlord will want you to bring your payments current sooner rather than later. Your landlord can also file what’s called a “Motion for Relief from the Automatic Stay,” which, if granted, would allow them to continue eviction proceedings and other collection actions.

Sometimes, folks will have a relationship with their landlord where there is mutual trust and the landlord may not be troubled by you catching up your rent after your bankruptcy is filed. However, if at all possible, you should make sure that your rent is current when your case is filed. If nothing else, it will allow you to avoid the stress that comes with being behind on your rent.

What if my landlord has a judgment against me?

If your landlord obtained a judgment of eviction against you before your bankruptcy was filed, the automatic stay does not protect you from getting evicted (having to move out). The only way the bankruptcy can protect you from an eviction after your landlord gets a judgment against you is if you certify to the Court, under penalty of perjury, that:

(a) state law allows you to cure the default that led to the eviction judgment being entered against you in the first place, and

(b) you deposited all money that comes due within 30 days with the clerk of the bankruptcy court.

If you cannot do that, the landlord can remove you from the residence without asking the bankruptcy court for permission first. The bankruptcy will not help you to stay in the home any longer.

If you can do that, then you have 30 days from the date your bankruptcy is filed to pay the entire amount needed to cure the default that caused the judgment in the first place. In other words, if you can pay all your back rent, fees and charges within 30 days from the date your bankruptcy was filed and notify the court that this has been done by filing a second certification, the automatic stay protects you from eviction. Keep in mind, however, that the landlord can object to your certification if you did not pay the full amount.  

Bankruptcy can also be a way to get out of a lease you know you can't afford. This is called "rejecting" the lease because you reject the future responsibilities that come with the lease.

What to do if you want to get out of the lease

Since rejecting the lease essentially constitutes a default under the lease it is very important to list the lessor as a creditor on your Schedule F in addition to listing it on your Schedule G to ensure the balance owing on the lease is discharged. In Part 2 of your Statement of Intentions, you will still list the lessor's name and type of lease and check "no" telling the court and your lessor that you are rejecting the lease.

Car or other personal property leases

If you are rejecting a lease for a car or other personal property, the lender will typically contact you to make arrangements for turning the property in. You can also contact the lessor yourself rather than waiting for them.

Residential lease

If you are still living in the property, keep in mind that you will be responsible for paying rent that accrues after your case is filed until you move out. Even though the discharge protects you from past due rent, and allows you to get out of the lease early, you cannot use that to avoid paying rent while you live in the property. The landlord has legal rights to pursue you for rent while you actually lived in the property, and the bankruptcy does not allow folks to stay in a property rent free.

Conclusion

If you are current with your lease payment, then the choice of whether to stay in the lease or get out of it early by rejecting it through the bankruptcy process is entirely up to you. If you are not current with your lease payment when your case is filed, staying in the lease can be a little more challenging and, depending on why you fell behind on the payments, may not be the best option for you. Either way - in bankruptcy you have options to take your life into your own hands by deciding what’s best for you and your family even when it comes to leases.