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.”
It doesn’t just stop creditors and landlords from making you pay what you owe. It also stops them from taking action against you or your property, such as to evict you if you’re behind. Your right to the leased home—your leasehold—is a form of property. Your leasehold is protected once you file a Chapter 7 case.
But that “automatic stay” protection has limitations.
For one, that protection is limited in time. Most consumer Chapter 7 cases take between 3 to 4 months to complete. The automatic stay kicks in when your bankruptcy lawyer files your petition to start your case. See Section 362(a) of the U.S. Bankruptcy Code. But it automatically ends when the bankruptcy court discharges your debts or closes the case (which usually happen almost simultaneously). Section 362(c) of the Bankruptcy Code.
You Must Act If You Want to Stay in Your Rental
Even during that 3-4 month period, you have to take action if you’re behind on rent and want to stay. The purpose of the automatic stay is to give you a bit of immediate relief from creditor and landlord pressure. It gives you time to consider whether you can and should keep the lease or leave it. Keeping the lease is called “assuming” it.
“Assuming” a Residential Lease in Default
If you decide that you want to stay in your rental, you start by formally stating that intention. Usually you do this at the same time as you file your initial petition that starts your Chapter 7 case. Through your bankruptcy lawyer, you complete and file a “Statement of Intention” indicating that you want to “assume” the lease.
By doing this you assert that you want to be bound by all the terms of your lease agreement. Naturally that includes your obligation to pay your monthly lease payments, including any missed ones. But it also includes all the other terms, such as keeping current on renter’s insurance, utilities, and such.
Although you need to be honest in your Statement of Intentions when you file your bankruptcy case, you don’t have to make a final decision until later in the case. In a Chapter 7 you generally have 60 days from the date you filed your bankruptcy case to decide for sure whether you want to keep the lease.
Curing the Default
In the meantime, you need to satisfy three requirements.
- Cure all of your prior monetary defaults. Again this includes any late monthly rent, but also potentially other obligations in the lease agreement. However, you may be able to discharge (write off) some obligations like unpaid utilities.
- Show that you can afford the lease obligations and will not likely default again. Your landlord may have some discretion about agreeing to you assuming the lease. Talk to your bankruptcy lawyer about local practices about this.
- Pay all monthly rental and other payments as they become due going forward.
In a Chapter 7 case you have to cure the unpaid rent and any other monetary defaults before you can assume the lease. You only have a month or two after filing to do this and meet the other two requirements.
The Landlord’s Motion for Relief from Stay
In the meantime the landlord will usually just wait to see if you will perform. But it can push the issue by filing a motion asking the court for permission to evict you. See Section 362(d) of the Bankruptcy Code. That’s more likely to happen if you don’t actively show that you are meeting the “assumption” requirements.
Just because a landlord files such a motion does not mean that you can’t stay in the home. It means that you and your lawyer have to respond to the motion and meet the “assumption” requirements. But you may need to do so somewhat more quickly than you would have otherwise.
What If You Can’t Catch up Fast Enough?
Especially if you’re only a month or two late on your rent, filing Chapter 7 and stopping paying all or most of your other debts can often free up enough money so that you can cure the default quickly.
But if you can’t get current on your payments and any other obligations fast enough, consider the Chapter 13 option. It can often give you much more time to catch up. That’ll be the topic of our next blog post.