CHAPTER 13 AND LEASES OR EXECUTORY CONTRACTS

Leases and executory contracts and how they affect a Chapter 13 is a source of great confusion.     In a Chapter 13 Bankruptcy case, you have to assume a lease or executory contract as a part of a the Plan you file in a Chapter 13 case. If you do not assume the lease or executory contract as a part of the plan that you file, the lease will automatically be terminated.  What you must do is pretty clear, however, there are numerous ways that this may affect your case.

  • WHAT IS AN EXECUTORY CONTRACT?

The case law on what constitutes an executory contract is extensive as what is or is not an executory contract is debated. A lease of real estate is one type of executory contract, but, sometimes making a determination as to what is or is not an exeutory contract is not so clear.  A documents is called a lease or executory contract when it really is not and sometimes a document is a lease or executory contract even thought not called that by the parties who signed it and are a part of it.

An executory contract or lease is an agreement where both sides still have things that each must still do. An easy example is a lease of a building where the landlord has to perform certain duties and the tenant must still pay rent and often has additional duties in addition to paying rent.  A purchase for a car where the residual value of the vehicle is purchased or surrendered by the debtor at the end of the term of the agreement and that decision to purchase or not causes the lender to have to take actions is often found to be a lease.

  • WHAT DOES A DEBTOR NEED TO DO IF THE PAYMENTS ARE CURRENT IN A CHAPTER 13 CASE IF THE DEBTOR WANTS TO ASSUME THE LEASE?

Section 1322(b)(7) of the Bankruptcy Code sets forth the standards and requirements for assuming a lease or executory contract. If the debtor is current on the lease payments and the lease does not have onerous terms and conditions later on in the lease, then, the Chapter 13 Plan simply will state that the lease or executory contract is being assumed and the assumption is complete.

WHEN MUST THE DEBTOR ANNOUNCE WHETHER THE LEASE OR EXECUTORY CONTRACT WILL BE ASSUMED OR REJECTED.

In the District of South Carolina, the lease should be assumed when the first plan is filed. Since the plan is usually filed when the rest of the Chapter 13 case is filed, the election to assume or reject a lease is filed early in a Chapter 13 case. Sometimes, a plan will not be filed at the time the Chapter 13 case is filed and it is possible to wait up to 28 days after the case is filed.

Sometimes the smart move is not to assume or reject and see what else may be occuring that may affect your decision. You may want to see how a valuation may play out before deciding how to act. This can be a problem in the District of South Carolina where the valuation motion is normally a part of a Chapter 13 Plan.

WHAT IF THE DEBTOR WANTS TO ASSUME THE LEASE BUT IS NOT CURRENT ON PAYMENTS?

Often, a debtor will be behind on payments under the executory contract. Section 365 of the Bankruptcy Court requires that the debtor cure, or provide adequate assurance that the debtor will promptly cure a monetary default.

The fight that has been fought many times is what constitues a prompt cure. Of course, if you pay the money to catch up the missed payments at the time you assume the lease, that makes the answer easy. Many times, a debtor does not have the money to catch up the missed payments that were due on the executory contract or lease at the time the assumption is attempted.

WHAT IS A PROMPT CURE?
There have been cases that find six months to catch up the missed payments is proper and other cases that find that six months is too much time. A real issue that must be proven when the debtor wants to make payments on the missed payments or make the cure is how likely the debtor is going to be able to make both the regular payments and the cure payment.

You should talk with your attorney and bring him a copy of your lease for review when you are considering filing a Chapter 13 Bankruptcy. The rules are the same in all cases, but, the application of the rules often make you wonder if the rules are actually the same in all cases.

About Nathan Davis, Esquire

Born in Charleston, South Carolina, Nathan Davis has been practicing law for many years. Mr. Davis has a wide variety of experiences having practiced domestic relations, criminal law, social security law having also practiced collection law in the past. This knowledge is helpful when someone needs to restart their financial life. The practice is now primarily bankruptcy and debtor representation work, but, Mr. Davis continues to also practice real estate law, trusts and estates and a general litigation practice. I believe that the most important part of representation is trying to leave you better off when the case is finished than when you started. Although I will do as my client directs, I will always tell you if I think that you are making a mistake. Bankruptcy is about a "fresh start". If you do not make changes in what you are doing, you will be doing what you are doing now in the future. There is no shame in bankruptcy or other steps that you may take to start your life over. Too often, people worry more about things than about themselves, their family or their future.
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