Tuesday, September 23, 2008

Assuming Leases in Bankruptcy

During these difficult economic times, many businesses that have been contacting Shenwick & Associates are faced with the threat of insolvency. Insolvency occurs when a business is unable to pay its debts as they become due. A very common business expense is a lease obligation. For most businesses, an office lease is essential to survival. Without a space to operate following eviction, most businesses would immediately fail. In order to prevent the harsh consequences of eviction, a business may seek protection through bankruptcy.

Two very important provisions of the Bankruptcy Code provide both immediate and remedial relief to business debtors facing eviction. First, under section 362 of the Bankruptcy Code, the business immediately receives the protections of the automatic stay. Specifically, section 362(a)(1) prevents the landlord from pursuing or continuing eviction proceedings against the debtor. Second, under section 365(a), the debtor in a chapter 11 filing may assume unexpired leases that were entered into prior to bankruptcy. The ability to assume a lease is a wonderful tool because it allows the business to avoid eviction by reinstating the lease. In order to properly assume a lease under section 365(a), the debtor must cure previous defaults, compensate the landlord for losses caused by the previous default, and provide adequate assurance of future performance. By properly assuming the lease, the business avoids eviction and remains in possession under the lease.

For businesses faced with the threat of eviction, the Bankruptcy Code may provide the relief they seek. Specifically, seeking bankruptcy protection allows the business to stay current and future eviction proceedings and reinstates the lease. With the lease reinstated, the business' chances of survival in these harsh times are dramatically improved. For more information about protecting your office space through the bankruptcy process, please contact Jim Shenwick.

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