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Executory Contracts in Chapter 7

January 25th, 2017 at 8:00 am

An unexpired lease or executory contract gets special treatment in bankruptcy. You’ll likely get the option of “assuming” or rejecting it. 


In our last blog post a couple days ago we introduced executory contracts and unexpired leases.

“Executory” means that neither party to the contract has fully performed, or executed, its commitments under the contract. It’s executory in that both parties have “something to be done or to happen before being fulfilled.”  

An unexpired lease is an executory contract because both the lessor and the lessee must continue to perform. The lessor continues to provide the property being leased to the lessee, for which the lessee continues to make payments.

An Executory Contract/Unexpired Lease Is a Liability But May Have Net Financial Value

At the moment you file your bankruptcy case your contract/lease is both a liability and an asset.

It’s a liability because you are obligated to make payments into the future. You may even be behind on some payments at the time of filing.

But the contract/lease is an asset as well. Your lessor is providing something of value into the future, such as your occupancy of an apartment.

Whether the contract/lease has any NET value depends on its terms. If the terms are very favorable, if you’re paying much less for what you’re getting than is generally available, then under some circumstances your contract/lease could be sold because those great terms would be valuable to someone else.

For example, if you had 3 years left on an apartment lease costing $300 less per month than the current market rate, you could assign that lease to somebody else and get paid for it (assuming the lease was assignable).

But most contracts/leases have no net value simply because their terms likely just reflect market forces. You usually aren’t lucky enough to get into a contract/lease for significantly less than everybody else.

Now let’s see why all this can matter when you file a Chapter 7 “straight bankruptcy” case.

Chapter 7 Trustee’s Right to Assume or Reject a Contract/Lease

At the time you file your Chapter 7 case everything you own temporarily goes into your “bankruptcy estate.” Section 541(a) of the Bankruptcy Code. Practically speaking, most of the time you don’t lose possession or use of anything. And you get everything “back” when your case closes 3-4 months later. That’s because everything you own is usually “exempt,” or protected, from your creditors. If so then everything is also protected from the Chapter 7 trustee acting on your creditors’ behalf.  

That “everything you own” that is part of your “bankruptcy estate” includes your executory contracts and unexpired leases. Again, those contracts/leases seldom have any net value. If yours does not, your trustee will have no ability to “assume” it on behalf of the “estate.”

Your Option to Assume or Reject

If your Chapter 7 trustee does not assume a contract/lease within 60 days of case filing, it’s considered rejected. Then, at least with personal property like a vehicle or furniture, you have the option of assuming the contract/lease yourself. You give written notice to the creditor/lessor as part of the bankruptcy paperwork. Then the creditor/lessor has the choice whether to agree or not to you assuming the contract/lease. Usually the creditor/lessor will be happy to continue making a profit on the contract/lease and so will agree.

If you don’t want to continue being bound by the contract/lease, you can reject it. That terminates the contract/lease, and your bankruptcy usually discharges (writes off) the debt.


Any executory contract or unexpired lease you have becomes property of your “bankruptcy estate” when you file a Chapter 7 case. The bankruptcy trustee then has the option of assuming or rejecting it. These contracts/leases seldom have any net value so almost always the trustee rejects it. This gives you the right to assume or reject it yourself. If you assume it, you get all its benefits and liabilities. If you reject it, you give up the contract/lease but usually do not owe anything on it any longer.


Unexpired Leases and Other Executory Contracts in Bankruptcy

January 23rd, 2017 at 8:00 am

Unexpired leases and executory contracts can continue on after you file your bankruptcy case. What are they and what makes them special? 

Debt Contracts

Most debts arise out of a written contract. You sign a credit card application agreeing to pay according to the stated terms. Go to a new doctor and you sign a form agreeing to pay for all services to be provided. Buy furniture, appliances, or electronics at a retail chain store after agreeing in writing to pay for the goods purchased. Buy a vehicle and sign the lender’s loan document. Buy a home and sign dozens of mortgage documents.

In all these situations the creditor provides you money, goods, or services which you agree to pay for. At that point the creditor has finished performing its obligation. Now you are supposed to perform your side of the bargain—to pay the debt.

Executory Contracts and Unexpired Leases

But there’s a different kind of debt contract that isn’t as common. These are arrangements in which BOTH the creditor and you have significant acts to perform going forward. The creditor hasn’t already given whatever money, goods, or services it’s required to provide. It’s obligated to continue providing something more, usually ongoing services.

The most common types of executory contracts are unexpired leases. If you are leasing a vehicle or renting an apartment, the lessor/landlord owns the vehicle or the apartment building. It allows you to keep possession of its vehicle/apartment, and continues to provide that to you day by day, month by month.

Bankruptcy Treatment of Executory Contracts and Unexpired Leases

Straightforward debts are relatively easy for bankruptcy to deal with. You owe a debt. The creditor has finished providing you something. Then you file your bankruptcy case and it’s going to discharge—legally write off—that resulting debt or it’s not.

But what if you file a bankruptcy case, but then the creditor continues to be obligated to do things for you during and after your bankruptcy is filed and even completed?

Contracts Still in Force

Here are some examples of consumer executory contracts—in which both parties have continuing obligations—to show how common they can be:

  • vehicle leases
  • residential rental or lease agreements
  • service contracts on home furnaces, security systems, appliances, and electronics
  • insurance contracts on everything from your smartphone to your life
  • personal property leases, including rent-to-own furniture and appliances
  • vacation time-shares
  • contracts for purchase of real estate, including a seller-financed purchase of a home
  • storage unit rentals
  • homeowners’ association agreements with monthly fees and long-term assessments

In Business

If you operate a business—even a tiny one—you can have many other kinds of executory contracts and unexpired leases:

  • leases of business premises
  • equipment and other personal property leases
  • contracts with vendors and suppliers
  • agreements with independent contractors providing services
  • investor and partnership agreements
  • software and other computer use and services contracts
  • conventional and internet advertising agreements
  • specialized real estate leases for timber, oil and minerals
  • copyright, patent, trademark, and other intellectual property
  • franchise agreements

Keeping Contracts and Dumping Them in Bankruptcy

Because of how different executory contracts and unexpired leases are from conventional debt contracts, the bankruptcy system has had to come up with a special set of laws to deal with them. In the next few blog posts we’ll look at how Chapter 7 and Chapter 13 address these contracts and leases. We’ll see how these options help you keep these contracts when you want to, and dump them when you don’t.


Getting Out of Your Vehicle Lease through Chapter 7

May 9th, 2016 at 7:00 am

A vehicle lease can cost you less up-front and each month, but is in reality very expensive. Bankruptcy is your way to break the contract.


The Big Disadvantages of Vehicle Leasing

Leasing has become an attractive way of getting into a new vehicle. The reasons seem sensible.  A vehicle lease often requires less money down, and the monthly payments are usually less than with a vehicle loan.

But like any deal that looks too good to be true, there’s a catch. In fact, there are several.

1. At the end of the lease term you own nothing. Pay off a vehicle loan and you have a free and clear vehicle for you to use for perhaps years more while not needing to make monthly payments. Instead, at the end of a lease you have nothing. And you have to figure out how to pay for another vehicle. So what seemed less inexpensive short-term ends up being more expensive long-term.

2. Because you have nothing at the end of a lease, you don’t have a used vehicle to use for part or all of a down payment. There’s a good chance that you haven’t used the lower monthly lease payments to save money for a cash down payment on your next vehicle. So you may well be induced to get into another vehicle lease, the continuation of an expensive cycle.  

3. If you end up driving the vehicle more than the contract allows you would be hit with very substantial penalties at the end of the lease. This can also happen if you have excessive wear and tear, on either the interior or exterior. You may even have to pay extra if the vehicle ends up having depreciated more than the lease creditor (the “lessor”) estimated at the beginning of the lease contract.

4. Getting out of the lease before the end of the lease term is usually tremendously expensive—often costing you several thousands of dollars. The amount you would owe would be based on the “realized value,” the relatively low amount the lessor would get from selling the vehicle at an auto auction, an amount that would not be known after you surrendered the vehicle.

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. That’s because you have possession of the car while it’s depreciating the most. Then you have to surrender it, and potentially even have to pay extra to just to get out of the lease. Then, without a trade-in vehicle, this is repeated with the next lease, so that you are continuously making payments, never to own a vehicle free and clear. It’s a continuous expensive cycle.

The Chapter 7 Discharge of Debts

A Chapter 7 “straight bankruptcy” can be your way out of this cycle.

“Discharge” is the legal write-off of a debt in bankruptcy. In a Chapter 7 case your debts are usually discharged within about four months of the filing of your case.

Vehicle lease obligations that you want to escape can almost always be discharged under Chapter 7. There are certain limited types of debts that are never discharged—such as unpaid child or spousal support. The discharge of other types of debts could be challenged by the creditor—such as debts incurred through fraud. So except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.

Discharge Early Termination or End-of-Lease Charges

You may need to escape the lease early because your circumstances have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve fallen behind on those payments. Or you may simply not need the vehicle any longer and need your money for more crucial expenses.

Or you may be at the end of your lease and owe for high mileage or excessive wear and tear on the vehicle.

In all these situations you can get out of your vehicle lease and not have to pay anything to the lessor.

“Rejecting” the Lease

When your Chapter 7 bankruptcy is filed, you have the option of either “assuming” or “rejecting” the vehicle lease. “Assuming” the lease means keeping the vehicle (if the lessor allows this) and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and discharging all of the lease’s financial obligations.

To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” This is sent to your lessor formally informing it that you want to terminate the vehicle lease.  

At the point when you “reject” your lease your lessor has the right to take back the vehicle. See Section 365(p)(1) of the U.S. Bankruptcy Code. So you or your attorney will usually make arrangements for that to happen in a way that is convenient for you.

Then you won’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.


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