People sometimes lease cars or apartments and then default on them. Normally, default leads to repossession and eviction proceedings, but chapter 13 bankruptcy can provide an alternative: assuming the defaulted lease. Assuming a lease allows lessees (debtors in this case) to keep using whatever they’re leasing by curing the default and resuming the payments. The bankruptcy code authorizes debtors to assume leases in their chapter 13 repayment plans as discussed in § 365, which addresses unexpired leases and “executory contracts” (contracts in which neither side has completely performed its obligations). There are a few things to know about assuming a defaulted lease or executory contract.
As stated above, debtors may not simply resume payments on a lease as though the default didn’t occur. Debtors are obligated to either “cure” the default or convince the bankruptcy court that they will “promptly” cure it in the near future. If debtors can cure the default then and there, they need only convince the court that they can make future lease payments on the repayment plan. If debtors can’t cure the default immediately, they will usually have to include extra payments to the lessor (the party from which they are leasing the property) into their repayment plans to cure the default.
One problem that can arise is that the lessor will challenge debtors’ repayment plans because they don’t “promptly” cure the default. The bankruptcy court has some leeway in determining what is prompt and what is not, but for the most part, so long as debtors’ plans are reasonable they’ll be able to cure the default. Obviously, the bankruptcy court will not will not consider a cure period of a full five-year repayment plan “reasonable,”and they won’t allow a cure period that is longer than the time remaining on the lease. However, cure periods of more than a few months can occur.
The only other potential snag debtors might run into is if the cure period the bankruptcy court approves is shorter than the amount of time it takes for the plan to be confirmed. One way to deal with this is to file a motion for an interim distribution to make the bankruptcy trustee pay the lessor. Bankruptcy courts can often be persuaded to prevent these kinds of problems from developing in the first place.
For answers to more questions about leases, executory contracts, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced chapter 13 bankruptcy attorneys Bruce Weiner for a free initial consultation.
