What happens to my lease in a Chapter 7?
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UPDATED: Jul 16, 2021
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If a Chapter 7 bankruptcy is underway and the lease is not yet terminated, there are two options to consider: resume or reject the lease within 60 days of filing. If necessary, it is sometimes possible to get an extension.
Legally, during this time a landlord is forbidden to terminate a lease because of bankruptcy. He or she also cannot change the conditions of the lease in his or her favor, increasing the rent, for example, or asking for a more of a security deposit because of the bankruptcy. A landlord does, however, have the opportunity to get involved if unpaid rent is included in the bankruptcy filing. He or she will generally receive notice of intent and be allowed to attend the meeting of creditors, state his or her position and explain how not paying rent will cause a financial burden.
In Chapter 7, a trustee is appointed by the court in order to liquidate all the assets of the debtor. The money generated from this liquidation is then used to repay debts owed, although it is unlikely that everything will end up being paid. Once the assets are distributed, remaining eligible debts are forgiven.
Claims made against the debtor before bankruptcy was filed are called pre-petition claims. Any rent not paid before filing is considered a pre-petition claim. However, if the tenant continues to stay on the premises after filing bankruptcy, any subsequent claims are considered post-petition claims.
Rent that was not paid before the bankruptcy, or pre-petition claims, are considered unsecured claims and will be among the last claims to be paid. Often, back rent ends up not being paid, or not paid in full.
Post-petition clams are considered administrative claims and will be paid prior to other claims, such as those made by unsecured creditors. If there are other claims to be paid and insufficient funds for all of the claims, then all the claims will be paid a portion of the available money.