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How Do I Reject a Residential Lease in Chapter 7 Bankruptcy?

It’s Simple: Just File a Chapter 7 Bankruptcy

residential lease in Chapter 7 bankruptcy

Image by Gertjian R., courtesy of Wikimedia Commons

Debtors Have No Power to Reject or Assume a Residential Lease in Chapter 7 Bankruptcy

In Chapter 7 or Chapter 13 bankruptcy, the terms of a lease may, prospectively, be either “assumed” or “rejected.” If the terms of the lease are assumed, obligations the filing debtor may have under that lease are continued. A lease for personal property, such as a car rental lease, if “assumed,” continues to be enforced as a financial obligation of the debtor after the bankruptcy is filed. A rejection of such a lease is a disclaiming of the terms of the obligation by the debtor, and the legal default of the lease created by its rejection is treated as a pre-filing debt just like a credit card or medical debt, to be completely discharged by the bankruptcy.

In a Chapter 13 bankruptcy, whether a lease is rejected or assumed depends upon how that lease is treated (described) in the Chapter 13 payment plan that each filing debtor drafts with his or her bankruptcy lawyer and files with the court.

In a Chapter 7 bankruptcy, a lease’s assumption or rejection is governed by its inclusion or treatment on a part of the bankruptcy petition called the Statement of Intent. On that statement, a lease may be listed and described as being either assumed or rejected. Any debt created by the rejection of the lease is discharged by the bankruptcy.

So a Chapter 7 bankruptcy is a good way to walk away from a lease vehicle that you  may no longer with to continue paying for or which may have a hefty upcoming mileage penalty attached. (Of course, you have to give the car back!)

What about a residential lease for occupancy of an apartment or rental home?

Residential Leases in Chapter 7 Bankruptcy: Who Can Assume?

A residential lease can only be assumed in a Chapter 7 bankruptcy by the Chapter 7 Trustee assigned to the case. The Bankruptcy Code (the Federal statute governing the bankruptcy process in the US) states that a Trustee in a bankruptcy case may assume or reject any unexpired lease of the debtor and that, if the Trustee does not assume or reject an unexpired lease within 60 days after the filing of the Chapter 7 bankruptcy case, the lease is “deemed rejected.”

What does that mean?

What it means is that, unless the Trustee affirmatively assumes the lease, it is rejected. If you want to walk away from the property (the landlords still retains rights to his or her property) and discharge the debt associated with its rental, filing the Chapter 7 bankruptcy alone has done the trick. There is no provision in the Bankruptcy Code allowing a debtor to either assume or reject a residential lease in Chapter 7 bankruptcy.

You don’t need to do anything further.

In fact, the only real reason to even list a residential lease on the Chapter 7 Statement of Intent is if you do want to continue residing in the property, the lease is not expired, you are current on the rental payment, and you just want something in black-and-white to make your landlord feel good about continuing to rent to you after the Chapter 7 filing—even if the listing of the residential lease on the Statement of Intent as “assumed” has no real legal effect.

In the Sixth Circuit Federal judicial district, where Michigan sits, the courts have made it clear that, if the lease is not assumed by a Chapter 7 Trustee, the legal default of the lease that occurred upon filing and upon the lease being deemed rejected by the Trustee’s failure to redeem creates a pre-petition debt that is discharged by the Chapter 7 bankruptcy along with all other (dischargeable) pre-petition debts—even if the tenant/debtor continued to reside in the property for a month or two after filing.

Rejecting a Residential Lease in Chapter 7 Bankruptcy: The Bottom Line

The bottom line is that Chapter 7 Trustees rarely, if ever, bother to either assume or reject a residential lease. If you would like to walk away from a landlord insisting on payment of back rents owed, a Chapter 7 bankruptcy will discharge such debt, even if you are still residing in the property at the time the bankruptcy is filed—although you should certainly start packing your bags at that point!

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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