What Happens To Leased Equipment During Bankruptcy?

Many businesses in the Milwaukee area choose to lease equipment rather than purchasing it. The Hanson & Payne team frequently assists our clients as they negotiate equipment lease agreements, extend or modify existing leases, and deal with the issues that arise when a lessor or lessee is in financial distress. 

Most equipment lease agreements are pretty straightforward. The lessor loans out equipment, for a specific period of time, for a set price, to the lessee. A typical contract also covers issues like equipment maintenance and who is responsible for removing and returning the equipment at the end of the lease. 

What is not always covered by the contract, but really should be, is what happens when things don’t go as planned. Specifically, what happens if either the lessor or lessee runs into financial difficulty? 

When Things Don’t Go As Planned

Under a properly drafted contract, the lessor should have the right to terminate the lease and recover its equipment if the lessee fails to make a payment. A properly drafted contract should also protect the lessee if the lessor runs into financial trouble. There is nothing worse than a healthy business being threatened because someone it does business with fails to live up to their end of a bargain. 

If at all possible, an equipment lease should be terminated before a bankruptcy case is filed. Bankruptcy courts will sometimes decide an equipment lease is actually a form of secured financing, and make sorting out who owns and owes what more difficult than it otherwise needs to be in the name of fairness to other creditors. 

Sometimes Bankruptcy Cannot Be Avoided

If either party files for bankruptcy while the equipment lease is still intact, and the court recognizes it is a lease and not an alternative financing agreement, the parties will need to negotiate a path forward. 

When a lessee files for bankruptcy, it typically has the option of assuming or rejecting the lease within 60 days of filing its case. A lessee that assumes its lease must cure any past defaults and prove that it is able to meet its obligations going forward. If the lessee chooses to reject the lease, or cannot meet the requirements it needs to in order to assume the lease, the lessor is entitled to recover possession of its equipment and make a claim for damages.

A lessee may be able to persuade the bankruptcy court to allow it to purchase equipment it has previously been leasing from a bankrupt lessor. It may also seek damages for harm to its business. 

Business-Minded Bankruptcy Attorneys In Milwaukee 

Whether you are a lessor or lessee, you need reliable legal counsel if you are going to enter into an equipment lease agreement. Hanson & Payne, LLC is a trusted advisor to many businesses in the Milwaukee area. We have a reputation for being business-minded in an industry that is often criticized for not understanding that working with an attorney is a means to an end. If you are looking for counsel on an equipment lease issue, please contact us today to schedule an initial consultation.