Assuming Defaulted Leases in Chapter 13

23 Oct Assuming Defaulted Leases in Chapter 13

Section 1322 of the Bankruptcy Code allows a debtor to assume an unexpired lease, such as for an apartment or car, in their Chapter 13 case. This right is subject to the provisions of Section 365 of the Code, which provide:

If there has been a default in an executory contract or unexpired lease of the debtor, the [Chapter 13 debtor] may not assume such contract or lease unless, at the time of assumption of such contract or lease, [he]–

(A) cures, or provides adequate assurance that [he] will promptly cure, such default [other than, in general, a nonmonetary default];

(C) provides adequate assurance of future performance under such contract or lease.

I’ve edited the section to highlight the point I’m making in this article, which is that to assume a defaulted lease in Chapter 13 a debtor must cure or convince the Court that he will “promptly” cure the default. Moreover, the debtor must convince the Court that he will be able to make the regular payments going forward. The latter will usually be satisfied by evidence of post-petition payments and a feasible plan. However, the first requirement is a bit more murky.

Most Chapter 13 debtors will want to do it this way: Insert plan provision assuming their desired lease and pay out the arrears over the plan term. However, if challenged by the lessor, such a provision may not be considered a “prompt” cure within the meaning of Section 365. There has been little litigation on this issue, but some courts have examined the issue of what constitutes a prompt cure under these circumstances. For example, the court in the case of in re Reed, 226 B.R. 1 (Bankr.W.D.Ky. 1998) held that a six-month cure was required to assume a defaulted car lease and satisfy the requirement of promptness. Other courts have held that longer cures are permissible. See, e.g., in re Coors of N. Miss., 27 B.R. 918 (Bankr.N.D.Miss. 1983) (three years).

If a court is inclined to allow only a short cure period, a real problem is that in most jurisdictions (including here in Massachusetts) plan confirmation and accompanying distributions will take longer than any short cure period. There are ways to deal with this in the face of pressure from the lessor. Two approaches would be to file a motion for an interim distribution to the lessor from the trustee or to carve out direct payments to the lessor before plan confirmation in addition to regular lease payments. Either approach should work as long as the debtor has sufficient income to make the regular lease payments plus the cure payments (either via the trustee or directly) in the amount of time that the court considers “prompt.” Like many terms in bankruptcy, and the law in general, what is “prompt” is a flexible term that, in practice, vests wide discretion in the court to do what it thinks is fair under the circumstances. Since a Chapter 13 debtor usually will need a car or home in order to earn a living and make plan payments, I expect that most courts will be generous in the amount of time they allow debtors to cure lease arrears.

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