What Happens to an Unexpired Lease If I File for Bankruptcy?
In a Chapter 13 bankruptcy, a debtor files a proposed plan of reorganization with the court. In plain terms, the debtor must explain how they will repay their creditors over a three- to five-year period. To assist in this, the court will appoint a Chapter 13 trustee, who acts as the legal representative of the “bankruptcy estate,” i.e., the property of the debtor that is available to pay back the creditors.
11th Circuit: Debtor Could Not Assume HVAC Lease Without Trustee’s Approval
Although the debtor can make a number of decisions regarding the course of their Chapter 13 reorganization plan, many of these actions still require the trustee’s consent. The U.S. 11th Circuit Court of Appeals, which oversees bankruptcy appeals from Florida, recently addressed one potential area of conflict between debtors and trustees. Specifically, can a debtor accept an “executory contract” as part of the bankruptcy estate without the trustee’s consent?
An “executory contract” basically means an agreement that has not been fully performed or executed. The most common example of this is a lease. For example, if you lease an apartment for one year, the contract is not fully executed until you make your final rental payment.
When filing for Chapter 13 bankruptcy, the debtor may elect how to treat any executory contracts. The debtor can assume, reject, or assign the contract. But the debtor’s choice is also subject to another provision of the Bankruptcy Code granting the trustee authority to decide what property should be included in the bankruptcy estate.
In the case before the 11th Circuit, In re Cumbess, a debtor leased a residential air conditioning unit from one of his creditors. When the debtor later filed for Chapter 13 bankruptcy, he elected to assume the unexpired lease. But the trustee assigned to the debtor’s case never approved this decision.
After the bankruptcy court confirmed the debtor’s reorganization plan, he failed to keep up with his ongoing payments to the creditor. The creditor then asked the court to treat these missed payments as a priority claim under the Bankruptcy Code. The trustee objected to this request, arguing that since she never approved the debtor’s assumption of the unexpired lease, it was not legally part of the bankruptcy estate.
The 11th Circuit, affirming two lower court rulings, agreed with the trustee. As noted above, there are limits on a debtor’s ability to assume an executory contract in a Chapter 13 case. One such exception clearly states that if “a lease of personal property is rejected or not timely assumed by the trustee … the leased property is no longer property of the estate.” The debtor therefore could not unilaterally confirm the creditor’s debt without the trustee’s approval.
Speak with a Florida Bankruptcy Lawyer Today
As you can see, a bankruptcy case involves a number of different parties, each with their own legal rights and responsibilities. If you need help navigating this complex system, an experienced Miami Chapter 13 bankruptcy attorney can help. Contact the Law Office of Julia Keaflinos at 305.676.9545 to speak with someone today. Our office remains open for consultations during the COVID-19 emergency and we can meet with you in-person, or via Skype, FaceTime, WhatsApp and other such video conferencing means while following all safety precautions recommended by the CDC.