The Treatment Of Leases In Bankruptcy

The Treatment Of Leases In Bankruptcy

It is not uncommon for a bankruptcy debtor, whether a natural person or an artificial person such as a corporation, to hold leasehold interests. As examples, an individual bankruptcy debtor may be leasing an apartment while a corporate debtor may be leasing equipment for its construction business. Title 11, also known as the Bankruptcy Code, gives debtors substantial control over the treatment of leases. For example, the right to reject a lease is an absolute right on the part of the tenant and a landlord has no authority to challenge the debtor when exercising this option.

The filing of a bankruptcy case implements a powerful mechanism known as the automatic stay which acts as an injunction against the collection efforts of creditors. The automatic stay prevents creditors, such as landlords, from taking any collection action against a debtor without first obtaining bankruptcy court relief and approval.

Subject to bankruptcy court approval, tenants may assume or reject a lease with the peace of mind knowing they are protected by the automatic stay while they utilize this choice. This stops all collection activity by a landlord, including unlawful detainer or attempts to collect unpaid rent. Creditors who are subject to the automatic stay must file and have approved a motion to lift the stay to carry on any further collection activities.

For tenants with leases in effect at the time of their bankruptcy case filing, the tenant must either assume or reject the lease within 60 days of the date they filed their bankruptcy petition. Debtors may extend this period by motion if filed before the termination of this 60-day period. If a debtor assumes a lease, it agrees to fulfill the terms and conditions of the lease agreement in their entirety.

However, if a debtor assumes a lease in which the debtor was in default at the time of the filing of the bankruptcy petition, the debtor must pay all delinquent rent within a reasonable time. If the debtor fails to cure the delinquencies by the end of the 60-day period, the debtor must show that it can pay the arrearages within a reasonable time, such as a few months.

A debtor who holds a leasehold interest may also reject the lease within this same 60-day period, which happens automatically if the tenant does not assume the lease. The debtor as tenant has the option to negotiate a new lease with the landlord, subject to bankruptcy court approval.

Once a lease is rejected by a debtor, a landlord may file a motion for a bankruptcy court order requiring the tenant to vacate the leasehold. If the tenant fails to vacate and continues to occupy the premises after the filing of the bankruptcy case, any claim for rent incurred during this time is an “administrative claim,” which is considered a post-petition claim and paid before any other claims in the bankruptcy case.

Unpaid rent owed before the filing of the bankruptcy case is considered an “unsecured” claim, which is the last category of claims paid in a bankruptcy case. Thus, a lucky landlord may receive something, albeit pennies on the dollar for its claim for unpaid rent.

If you just need to discuss your Chapter 7 or Chapter 13 bankruptcy options, the Morrison Law Group is here to answer all your questions completely, patiently, and effectively. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.

The Treatment Of Leases In Bankruptcy

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