A commercial lease is one type of debt a business owner may wish to have discharged during the bankruptcy process. In Chapter 7 bankruptcy, the business owner may elect to walk away from a commercial lease if the company no longer wishes to operate in that space. The business owner can no longer benefit from that lease in any way after the bankruptcy discharge. The company must evacuate the commercial space.
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Determine the benefits of being released from a commercial lease during the bankruptcy process. Small businesses will be unable to operate at the location and may find it difficult to obtain a new lease for the business after filing bankruptcy.
Get out of an expensive business agreement such as a commercial lease by filing Chapter 7 bankruptcy as a small business. The bankruptcy court will liquidate any assets of the small business to fund any debts owed, if possible.
Provide clear documentation on the bankruptcy documents showing you wish to relinquish the lease on the property and not be held responsible for repayment of the debt. Enter the debt on the bankruptcy documentation. The bankruptcy court then treats the debt as any other type of debt the business has, including credit card debt and other unsecured loans.
Answer any questions or concerns from the bankruptcy court during the bankruptcy process should there be any. In most cases, the Meeting of the Creditors is the only time the debtor needs to be present in court to defend against any claims from creditors, such as the lease owner. It is rare for creditors to attend such meetings.
Obtain a bankruptcy discharge. At the time the bankruptcy court discharges the Chapter 7 bankruptcy case, the commercial lease will no longer be applicable. A discharge occurs when the bankruptcy court reviews the case and determines the Chapter 7 laws apply.
Realise that after the bankruptcy court discharges the commercial lease in bankruptcy, the creditor can no longer pursue the debt from the borrower. The business can no longer use the space in any way, and the property owner can rent out the facility to a new owner.
Tips and warnings
- In Chapter 13 bankruptcy, the bankruptcy court can rule to discharge the commercial lease if it is interfering with the company's ability to make money to repay other debts. The process of discharging the lease is the same as in Chapter 7 bankruptcy.
- In some small business bankruptcy cases, the bankruptcy court will liquidate the business' assets, sell those assets and use the funds to repay debtors, including the leaseholder. In some types of business structures, such as a sole proprietorship, the bankruptcy court does not distinguish between personal and business property.
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