Leases as Executory Contracts
Under the Bankruptcy Code, leases — whether for an apartment, a house, or a vehicle — are classified as "executory contracts." An executory contract is one where both parties still have material obligations to perform: you owe rent or lease payments, and the landlord or lessor owes you continued use of the property. This classification gives you a specific set of choices when you file bankruptcy.
For each executory contract, you must decide whether to assume it (keep it and continue performing your obligations) or reject it (walk away, treating the remaining obligations as a dischargeable debt). This decision has significant practical consequences for your housing and transportation.
Apartment and Residential Leases
If You Want to Keep Your Apartment
If you want to keep your apartment, you must assume the lease. To assume a lease in Chapter 7, you must cure any existing default (catch up on missed rent), provide adequate assurance of future performance (demonstrate that you can pay going forward), and file a motion with the court to assume the lease within the time limit set by the trustee or court.
In Chapter 7, the trustee has 60 days from the filing date to assume or reject a residential lease. If the trustee does not act within 60 days, the lease is deemed rejected. However, you as the debtor can request that the trustee assume the lease on your behalf, and most trustees will do so if you are current on rent and want to keep the apartment.
In Chapter 13, you have more flexibility. You can assume the lease as part of your plan, cure any arrears over the plan period, and continue making regular rent payments. The automatic stay prevents your landlord from evicting you while the case is pending, giving you time to catch up on missed rent through the plan.
If You Want to Walk Away from Your Apartment
If you want to leave your apartment — perhaps because you can no longer afford the rent or you are moving — you can reject the lease. Rejection treats the remaining lease obligations as a pre-petition debt, which is discharged in bankruptcy. This means you are not liable for future rent through the end of the lease term.
However, rejection does not eliminate all consequences. The landlord can file a claim in your bankruptcy case for damages resulting from the rejection — typically the lesser of one year's rent or the rent for the remainder of the lease term, under 11 U.S.C. § 502(b)(6). This claim is treated as an unsecured debt and discharged along with your other unsecured debts.
You will also need to vacate the apartment after rejecting the lease. The landlord can seek relief from the automatic stay to proceed with eviction once the lease is rejected.
Security Deposits
If you have a security deposit with your landlord, it is property of the bankruptcy estate. However, the landlord has the right to apply the deposit to any damages or unpaid rent after you vacate. If the deposit exceeds the landlord's legitimate claims, the surplus is returned to you (or to the trustee, if it is non-exempt).
Car Leases
A vehicle lease is also an executory contract, but the rules differ slightly from residential leases because a car lease is a personal property lease rather than a real property lease.
If You Want to Keep Your Leased Vehicle
To keep a leased vehicle in Chapter 7, you must assume the lease. You must be current on payments (or cure any arrears) and file a motion to assume the lease. Once assumed, you continue making your regular lease payments directly to the lessor as if the bankruptcy had not occurred.
Unlike a purchased vehicle with a loan, you cannot "cram down" a lease — the cramdown provisions of Chapter 13 do not apply to leases. You must either assume the lease at its original terms or reject it.
If You Want to Return the Leased Vehicle
If you want to return the leased vehicle — because you can no longer afford the payments or the vehicle is not worth keeping — you can reject the lease. The lessor will repossess the vehicle, and any remaining lease obligations (including early termination fees and the difference between the vehicle's value and the remaining lease balance) become unsecured debts that are discharged in bankruptcy.
This can be a significant benefit if you are in an upside-down lease with substantial termination penalties. Bankruptcy allows you to walk away from those obligations without paying the termination fees.
Practical Considerations
The decision to assume or reject a lease is one of the most practically significant choices in a bankruptcy case. Before filing, discuss with your attorney:
- Whether you want to keep your apartment or car, and whether you can afford to do so going forward.
- Whether you are behind on rent or lease payments, and how much it would cost to cure the arrears.
- Whether the landlord or lessor is likely to consent to assumption or whether court approval will be required.
- What the financial consequences of rejection would be, including any damage claims the landlord or lessor might file.
Use our directory to find a bankruptcy attorney near you who can advise you on the assume-or-reject decision for your specific leases.
Take our free Debt Relief Options Quiz to understand your options and what you can keep when you file.
