Bankruptcy and Your Lease: What the Automatic Stay Actually Does

Your Actual Exposure: $250,000

A $5,000/mo bankruptcy lease doesn't create $5,000/mo in liability. It creates $250,000 in total exposure across rent, personal guaranty, restoration, and every other clause your landlord drafted to protect themselves — not you.

Where $250,000 Comes From

What Most People Miss

The guarantor isn't protected. Bankruptcy's automatic stay protects the filing entity. If you personally guarantied the lease and the company files bankruptcy, the landlord can immediately pursue you personally — the automatic stay doesn't apply to you.

Key Risks in This Scenario

• Automatic stay protects the debtor entity but NOT the personal guarantor
• Lease must be assumed or rejected within 120 days in Chapter 11 — rejection creates a general unsecured claim
• Post-petition rent is an administrative expense and must be paid in full — no discount

How to Reduce Your Exposure

• File personal bankruptcy simultaneously if the personal exposure is catastrophic
• Negotiate lease rejection damages with the landlord during the bankruptcy process

Frequently Asked Questions

What does the automatic stay do when a tenant files bankruptcy?

The automatic stay immediately halts all collection actions against the debtor — including eviction, collection calls, and lawsuits. It buys time. But it doesn't discharge the debt — it just pauses collection.

What happens to a lease in Chapter 11?

The debtor (tenant) must decide to 'assume' (keep the lease and cure any defaults) or 'reject' (surrender the lease, which becomes a general unsecured breach of contract claim). Rejection caps landlord damages at the lesser of 1 year's rent or 15% of remaining rent (not to exceed 3 years' rent), whichever is less.

Does bankruptcy protect personal guarantors?

No. The automatic stay protects the bankrupt entity. Guarantors must file their own separate bankruptcy for any protection. The landlord can immediately pursue guarantors when the tenant files bankruptcy.

What is a lease rejection damage cap?

Under 11 U.S.C. § 502(b)(6), a landlord's claim for lease rejection damages is capped at the lesser of 1 year's rent or 15% of remaining rent (up to 3 years' rent). This is a significant protection for bankrupt tenants rejecting long leases.

Can a bankrupt tenant surrender the keys and walk away?

Surrender through lease rejection is a formal bankruptcy process, not just handing in keys. The surrendered lease becomes a rejection damages claim (capped per statute), which is paid as a general unsecured claim — typically cents on the dollar in Chapter 7.