Your new rent-to-own company is thriving. Business is strong, customers are satisfied, and operations are running smoothly. Then one day, you open your mailbox to find a notice of bankruptcy from a reliable customer who has been making regular payments for months. What should you do next?
Despite a positive payment history and open lines of communication, you do not need to contact the customer directly to try to resolve any issues. When a customer files for bankruptcy, the federal bankruptcy court immediately imposes an automatic stay. This prohibits all collection activities, including phone calls, emails, demands for payment, and repossession efforts. The duration of the stay varies depending on case specifics, but the key initial step is clear: cease all contact with the customer and halt any planned repossessions immediately upon receiving notice of the filing.
Some people have asked me if they can include a provision in their lease that triggers an automatic termination of the lease agreement once the customer files for bankruptcy. It’s a good thought, but the answer is no. These are called ipso facto clauses, and are generally unenforceable.
Next, you need to determine whether the filing is under Chapter 7 or Chapter 13 bankruptcy.
In a Chapter 7 case, the debtor seeks to discharge eligible debts through liquidation of non-exempt assets. Because rent-to-own (RTO) transactions are true leases rather than secured transactions, your position as lessor is relatively straightforward. There is generally little risk to the leased property itself during the case. If you can get a copy of the customer’s schedules, look for a document called Statement of Intentions to see if they intend to assume your lease and continue making payments, or reject the lease. Even if they are rejecting and terminating the lease, you need to monitor for a subsequent notice of dismissal or discharge. Once the case is discharged or dismissed, the automatic stay usually terminates, allowing you to resume communication with the customer to discuss continuing payments under the original lease terms or retrieval of the property.
A Chapter 13 filing, by contrast, involves a reorganization plan in which the debtor repays debts over time, often three to five years. Again, the true lease structure limits the debtor’s options regarding your agreement. Under bankruptcy law, the lease must be either assumed in full—meaning the debtor continues making payments exactly as specified in the lease—or rejected, resulting in surrender of the property. Again, if the lease is rejected, you cannot immediately repossess the property without permission from the court. Rather, wait until the case is confirmed, at which time the rejection and termination become official. The debtor cannot modify terms, such as reducing monthly payments, through the Chapter 13 plan.
Occasionally, a debtor’s attorney may mistakenly list your claim as secured rather than as a lease. If that happens, a phone call or email to the debtor’s attorney is often an effective first step. Try to explain that the transaction is a true lease, requiring assumption or rejection in its entirety, and cannot be treated as a secured claim. Highlight the lease provision permitting the customer to terminate at any time without penalty or further obligation—this clause helps preserve the agreement’s status as a true lease and prevents recharacterization as secured financing.
If the attorney is unresponsive or unwilling to amend the plan, consult a bankruptcy attorney experienced in creditor representation. As a creditor, you may file a proof of claim, a withdrawal of claim, or a request for notice without an attorney. However, objecting to the plan or seeking relief from the automatic stay requires representation by counsel in the federal bankruptcy court where the case is pending.
In Chapter 13 cases, filing a proof of claim is particularly valuable and something you can do on your own without an attorney. This official form notifies the bankruptcy trustee and the debtor’s attorney of your lease terms, account status, remaining balance, and required monthly payments. The standard proof of claim form is available through the U.S. Courts website. For NSRA members, a detailed instructional video on completing the form and registering for a PACER account is accessible in the members-only section of the NSRA website.
Speaking of PACER (Public Access to Court Electronic Records), register for an account right away if you have not already done so. This federal judiciary system provides access to bankruptcy filings and enables you to monitor cases, receive electronic notices of filings, and file certain documents as a creditor.
NSRA members have access to valuable resources to navigate bankruptcy matters effectively. In the coming weeks, the association plans to offer a virtual class covering bankruptcy fundamentals and additional topics, with opportunities to ask questions. If you are not yet a member, consider joining now to benefit from industry-specific guidance, professional connections, standardized forms, and timely updates from across the country.
By acting promptly, understanding the distinctions between Chapter 7 and Chapter 13, and leveraging available resources, rent-to-own providers can protect their interests while complying fully with bankruptcy requirements.
