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What If I'm Behind on My Rent But Want to Stay in My Rental?
In a Chapter 7 “straight bankruptcy” you can usually “assume” your lease agreement. But you have to get current fast and keep current.
In our last blog post we established that your landlord can’t end your lease just because you file bankruptcy. That’s true even if your lease agreement clearly says that filing bankruptcy itself constitutes a breach of the agreement. But what if you are in breach of your lease agreement in other ways, such as being late on rent payments? Can bankruptcy still help you stay in your rental?
Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” CAN help. Today we cover how Chapter 7 helps; tomorrow we’ll get to Chapter 13.
Chapter 7’s Short Breathing Spell
The moment you file your Chapter 7 case you get a limited break from your creditors, including your landlord. That break is called the “automatic stay.”
Can My Landlord End My Lease Just for Filing Bankruptcy?
Your landlord CAN’T evict you for filing bankruptcy. A lease provision which allows for eviction upon bankruptcy filing is unenforceable.
Federal Bankruptcy Law and Lease Termination
Federal law does not allow your landlord to terminate your lease just because you file a bankruptcy case. U.S. Bankruptcy Code Section 365(e)(1) says:
an... unexpired lease of the debtor may not be terminated or modified... at any time after the commencement of the [bankruptcy] case solely because of a provision in such... lease that is conditioned on—
(B) the commencement of a case under this [bankruptcy] title
In other words, once you file bankruptcy the landlord can’t end the lease just because the lease agreement says the landlord can end the lease when you file bankruptcy. That provision in the agreement is legally unenforceable.
For Example
Escaping a Vehicle Lease in Chapter 13
Getting out of a vehicle lease by “rejecting” it in Chapter 13 isn’t quite as quick as in Chapter 7 but has about the same practical effect.
Getting out of Your Lease in Chapter 7 vs. Chapter 13
Two days ago we discussed how a Chapter 7 “straight bankruptcy” gets you out of a car or truck lease. It discharges (permanently writes off) whatever debt you’d have from surrendering that car or truck.
When you get out of a vehicle lease you often owe money to the lessor; sometimes a lot of money. That can be true whether you break the lease early or get to the end. Either way you could owe the lessor thousands of dollars in contractual fees.
Once you’ve decided that you need to file bankruptcy, and that you want to get out of the vehicle lease, as long as you qualify for Chapter 7 and it’s the best option overall, you can almost always discharge all the debts arising from the lease. A Chapter 7 case is likely the easiest and quickest option.
Escaping a Vehicle Lease in Chapter 7
Vehicle leases are often not such a good deal. If you find out your isn’t, you can almost certainly “reject” that lease and pay no more.
Our last two blog posts have been about how to keep your leased vehicle in a Chapter 7 or 13 bankruptcy case. But what if you don’t want to keep your lease? Vehicle leases are often not as good of a deal as you might have thought at the beginning. Bankruptcy gives you the rare and often valuable opportunity of getting out of your lease.
Today we talk about leaving your vehicle lease behind without owing anything on it through Chapter 7 “straight bankruptcy.” Our next blog post will be about how that works through Chapter 13 “adjustment of debts.”
Popular but Risky Vehicle Leases
We mentioned a couple blog posts ago that vehicle leases are getting more and more popular. In a recent 5-year span they increased from 17% to 27% of vehicle transactions. People clearly like the low money down and lower monthly payments that often come with leases.
"Assuming" a Vehicle Lease in Default in Chapter 13
Although Chapter 7 can work fine if you’re current on your lease, use Chapter 13 instead if you’re behind and need time to catch up.
Keeping a Leased Vehicle under Chapter 7
A couple days ago we wrote about keeping a leased vehicle through a Chapter 7 “straight bankruptcy” case. That requires formally “assuming” the lease and getting your lessor to go along with that.
The lessor is not likely going to go along with the “assumption” if you’re behind on the lease payments, and can’t catch up right away. Even if you’re now current but have had a weak payment history, the lessor may be reluctant to continue the lease.
Two Situations for “Assuming” a Lease under Chapter 13
First, as stated in our introductory sentence, Chapter 13 gives you much more time to get current if you’re behind. A Chapter 13 case takes much, much longer than a Chapter 7 one—usually 3 to 5 years instead of just 3 to 4 months. Being in a bankruptcy case that long may seem like a disadvantage. But since you are significantly protected from your lessor during that time, it can be a huge advantage. You usually can get so much more time to cure any missed payments. That can enable you to keep your leased vehicle when you otherwise simply could not afford to do so.
"Assuming" a Vehicle Lease in Chapter 7
You can most likely “assume” your vehicle lease and keep that vehicle under Chapter 7. But you need to be current or able to be quickly.
We've talked about unexpired leases and how they’re treated in a Chapter 7 “straight bankruptcy” case. Today we get into the most common big one—the vehicle lease.
More and More Vehicle Leases
In the five years from 2009 to 2014, the percentage of vehicle transactions that were actually leases went from about 17% to 27%.
Why this strong trend? No doubt there are lots of reasons. But people seem to fixate more on the monthly payment amount than anything else, which usually favors leases. Vehicle manufacturers have capitalized on this in their advertising. That month-to-month advantage often comes with the disadvantage of higher overall costs.
In any event, when money’s tight and you need reliable transportation, leasing may really be your only feasible option.
Executory Contracts in Chapter 7
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.
Unexpired Leases and Other Executory Contracts in Bankruptcy
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
Statutory Liens in Chapter 13
Chapter 7 provides limited help if your home is encumbered by a statutory lien. Instead Chapter 13 may significantly reduce what you pay.
Our last two blog posts have been about statutory liens on your home. We’ve gotten into what they are, and the trouble they can cause both without and even within bankruptcy.
The main trouble statutory liens cause under Chapter 7 “straight bankruptcy” is that they survive to live on afterwards. The debt secured by the lien may be forever written off but the lien continues to attach to your home.
So under Chapter 7:
- an income tax lien recorded on your home continues on even if the underlying tax qualifies for discharge (legal write-off)
- a construction/mechanic’s lien stays on your home even if the debt to your contractor upon it is based is discharged
As a result these liens continue to be on the home’s title. You’re largely left on your own to deal with them, usually without a clear legal mechanism to do so. Sometimes these liens can be foreclosed, forcing you to pay off the lien to prevent loss of your home. More often they just continue encumbering your home until you sell or refinance it. So you have to pay off the lien then, taking a chunk out of your proceeds of sale or refinancing.
Statutory Liens in Chapter 7
Statutory liens survive bankruptcy. Chapter 7 may still be able to help in various ways and be your best solution.
In our last blog post we introduced statutory liens as a less common but still potentially important kind of lien. A statutory lien on your home is one that is usually imposed on your home without court action. It’s imposed when you meet certain conditions specified in a written law—a statute. The most common examples are income tax liens, contractor and mechanic’s liens, and homeowners’ association liens.
The most important practical concern about statutory liens is that they cannot be removed from your home in bankruptcy like judgment liens often can. Nevertheless, bankruptcy can often help solve your financial problems if you have a statutory lien. Today we show how that can happen under Chapter 7 “straight bankruptcy,” tomorrow in a Chapter 13 “adjustment of debts.”
Chapter 7 Discharge of Personal Liability
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