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Chicago Bankruptcy Question: What happens to leases in Chapter 7?

Chicago Bankruptcy Question of the Day: What happens to leases in a Chapter 7 bankruptcy?  The answer to this question truly turns on the nature of the lease and the intentions of the person filing for Chapter 7 bankruptcy protection. 

When you file for Chapter 7 bankruptcy protection in the Chicago area, you are required to disclose any and all leases in which you have an interest or to which you have an obligation under.  There is a separate schedule on your bankruptcy petition to disclose leases, on which you list the other parties on the lease, their address, a general description of the lease, the nature of your interest and your intention regarding the lease.  Failure to properly schedule an interest in a lease can have dire consequences, so you want to ensure that you disclose all leases to your bankruptcy attorney.

In most Chapter 7 cases, the person filing the bankruptcy is the lessee, or the person who is leasing the item in question.  This is usually either an apartment or a vehicle, but may include such items as a parking space, storage space or "rent to own" items such as furniture, appliances and electronics.  The filer is supposed to elect to either assume or reject the lease at the time of filing.  Assuming the lease means that you will maintain your payments and commitments under the lease and, in exchange, you will be able to keep possession of the property.  Rejecting the lease means that you will surrender the property back to the lessor, your obligation under the lease will be terminated and any debt owed will be discharged in the Chapter 7 bankruptcy.

Less frequently, but far from rarely, the person filing for bankruptcy protection in Chicago is the lessor, or the person leasing the property to somebody else.  In these cases, it is a somewhat trickier proposition.  The filer's interest in the lease becomes property of the bankruptcy estate and as such, the Chapter 7 trustee has the right to liquidate any value that there may be in the lease.  This is common where the filer is leasing units in a rental property and collecting rents, but is surrendering the property and not paying the mortgage.  The Chapter 7 trustee will look for those rents to pay creditors with.  If the filer elects to reject the lease, they must remember that the lessee still has rights under the lease, such as possession of the unit, that cannot be terminated in bankruptcy and require a proper eviction proceeding.  With leased vehicles and higher value personal property, you need to watch the buyout clauses and potential equity in the vehicle/property.  If there is enough equity that is not exempt, the trustee may elect to buy out the lease and then liquidate the vehicle/property and use the proceeds to pay creditors. 

Having an experienced Chapter 7 bankruptcy lawyer represent you is the best way to ensure that your leases are properly treated in your case.  A good bankruptcy attorney will review the leases, advise you as to your options, discuss any risks with you and prepare you for potential action by the other party to the lease and the trustee.  At Ledford & Wu, our experienced Chicago bankruptcy attorneys are happy to offer you a free consultation to discuss your options and help guide you through a successful Chapter 7 bankruptcy.

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