Assuming and Rejecting Leases in Bankruptcy

Bankruptcy allows debtors to keep their secured property through reaffirmation agreements in Chapter 7 bankruptcy and by providing for payments inside out outside of a plan in Chapter 13 bankruptcy. However when the property that the debtor wants to keep is being leased the debtor chooses to assume or reject the lease. The ability to assume or reject a lease is provided by section 365(a) of The Bankruptcy Code.

When a debtor assumes a lease they agree to continue to be responsible for the payments under the contract terms despite the bankruptcy. Assumption allows the debt to survive the bankruptcy discharge. The alternative to assumption is to reject a lease. Rejection of a lease can be a powerful tool for a bankruptcy debtor. For example, consider a debtor who has an automobile lease with a balloon payment or who has gone over the allowed mileage of the contract terms. If the debtor is required to continue under the original lease terms they may be required to make a large payment to the lessor. By rejecting the lease the debtor may save thousands of dollars.

Debtors must assume or reject a lease within sixty days after filing their bankruptcy petition in Chapter 7 cases. In Chapter 13 cases assumption or rejection must occur before confirmation of the reorganization plan. If the lease’s contract payment is unreasonably high, the trustee may object to confirmation of the plan in a Chapter 13 case or object to discharge in a Chapter 7 case.