debt

Can a commercial lease forbid bankruptcy?

Justin HarelikDear Bankruptcy Adviser,
I'm entering into a commercial lease in Florida and the lessor wants me to sign a clause stating I cannot seek bankruptcy in the event the business fails. Is this legal? Or common?
-- Naomi

Dear Naomi,
You are right to believe that this lease agreement smells fishy. It is illegal, but not uncommon. Many of my clients tell me that payday loan lenders, hard money lenders or other small business lenders will place this type of clause in the contract.

Quite often, a client receives calls from unscrupulous debt collectors claiming that a debt was not eliminated in the bankruptcy even after the bankruptcy case was closed. The debt collector can sound very convincing, but I always put my clients at ease. The call is usually coming from a criminal organization that buys bad debt -- even debt discharged in bankruptcy -- and calls to collect. The debt collector will say anything to get you to pay something.

There are very few types of debts that can't be eliminated in bankruptcy. If you could sign away your right to file bankruptcy, every single contract would have that clause. Bankruptcy would be eliminated altogether. Every creditor would have a contractual clause eliminating your right to file bankruptcy.

Even student loans can be eliminated in bankruptcy in some circumstances. Some common types that can't be eliminated are any debts incurred through fraud, government penalties or criminal restitution.

I always laugh when a client sends me a contract that says the debt is exempt from bankruptcy discharge. Putting something in writing and in legalese does not automatically make it true.

I would not even argue this point with the landlord since he or she will likely refuse to lease you the property without this clause. You could sign this lease and still file bankruptcy if you're unable to continue making the payments. You have the right to eliminate any outstanding lease balance in your bankruptcy.

One thing to keep in mind: If you do file bankruptcy, move out of the property immediately. Don't file bankruptcy only to stay and not pay for many months after filing. The landlord would have the right to collect any rent that comes due after the bankruptcy filing date but prior to you vacating the premises. Bankruptcy is a way to protect you, but it does not give you squatter rights.

Good luck and may you never need to file and only have decades of success in your new location.

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