When a Restaurant Lease Becomes a Burden You Cannot Carry

Running a restaurant in South Florida is hard work. Equipment costs alone, walk-in coolers, commercial ovens, point-of-sale systems, and hood ventilation units, can add up to tens of thousands of dollars. Many restaurant owners finance that equipment through leases rather than outright purchases.

When business slows down or closes, those monthly lease payments do not stop. Owners are often left owing money on equipment they no longer use or cannot afford. Bankruptcy can offer a legal path to walk away from those obligations. Understanding how that process works can help you make a more informed decision.

What Is an Executory Contract?

Under the Bankruptcy Code, a restaurant equipment lease is typically treated as an executory contract. That is a legal term for an agreement where both sides still have meaningful duties left to perform.

For example, you still owe monthly payments. The lessor still owes you the right to use the equipment. Because both sides have ongoing duties, the contract is "executory," and the Bankruptcy Code gives a debtor specific tools to deal with it.

There are two main options for executory contracts in bankruptcy:

  • Assume the contract: Keep the lease in place, cure any missed payments, and continue making payments going forward.
  • Reject the contract: Walk away from the lease. The rejection is treated as a breach of contract as of the date the bankruptcy case was filed.

For a struggling restaurant owner, rejection is often the goal.

How Rejection Works

Rejection does not erase the contract as if it never existed. Instead, the Bankruptcy Code treats it as though the debtor breached the contract on the day the case was filed. The lessor then has a claim against the bankruptcy estate for damages caused by that breach.

In most cases, that claim is treated as a general unsecured debt, similar to credit card balances or unpaid vendor invoices. In a Chapter 7 liquidation, general unsecured creditors often receive little or nothing. In a repayment plan under Chapter 13 or Subchapter V of Chapter 11, they may receive a portion of what they are owed over time.

The key point is this: rejection gives you a way to stop performing under a lease that no longer makes sense for your situation, while the resulting claim is handled through the bankruptcy process.

Which Chapter Makes Sense for a Restaurant Owner?

The right chapter depends on your goals and your financial picture. Here is a general overview:

Chapter 7 (Liquidation)

Chapter 7 is the fastest path. A trustee is appointed, non-exempt assets may be liquidated to pay creditors, and most remaining qualifying debts are discharged. To qualify, you must pass a means test comparing your household income to Florida's median income for a household your size.

For a restaurant that has already closed, or one where the owner has little personal property to protect, Chapter 7 can be a clean break. Equipment leases can be rejected, and the resulting damage claims are typically wiped out in the discharge.

Florida filers use state exemptions to protect certain property, including up to $1,000 in personal property equity, up to $1,000 in vehicle equity, protected retirement accounts like 401(k)s and IRAs, and the homestead exemption for a primary residence. Leased equipment generally belongs to the lessor, so it is returned rather than sold.

Chapter 13 (Repayment Plan)

Chapter 13 is available to individuals, including sole proprietors. It involves a three-to-five-year repayment plan approved by the court. Chapter 13 can allow a debtor to reject a lease while paying back some or all of the resulting claim over time, depending on income, expenses, and the size of the estate.

Subchapter V of Chapter 11 (Small Business Streamlined Path)

Subchapter V is a streamlined version of Chapter 11 designed for small businesses and small business owners who do not qualify for Chapter 7 or Chapter 13. It tends to be faster and less expensive than a traditional Chapter 11 case. A restaurant owner who wants to restructure, keep operating, and shed burdensome leases may find Subchapter V worth exploring with an attorney. The Bankruptcy Code sets eligibility limits based on the amount of debt owed.

The Automatic Stay and Equipment Lessors

When a bankruptcy case is filed, the automatic stay goes into effect under 11 U.S.C. 362. This generally pauses most collection actions while the case is open, including attempts by a lessor to repossess leased equipment. To learn more about how the automatic stay works in practice, see our post on the automatic stay explained.

There are exceptions and limits to the stay, especially for repeat filings. An equipment lessor may ask the bankruptcy court to lift the stay so they can recover the equipment, particularly if the debtor is not making lease payments and does not intend to assume the lease.

What Happens to the Equipment Itself?

When a lease is rejected, the equipment generally must be returned to the lessor. The debtor no longer has the right to use it. If the equipment is still on the restaurant premises, the lessor will typically coordinate pickup after the stay is resolved.

This can actually be a practical benefit. Owners are no longer responsible for maintenance, storage, or insurance on equipment they were not using anyway.

Deadlines and the Rejection Process

The timing of rejection matters. In Chapter 7, the trustee decides whether to assume or reject executory contracts. In Chapter 11 and Subchapter V cases, the debtor in possession generally makes that decision, subject to court approval. There are deadlines set by the Bankruptcy Code and local rules of the Southern District of Florida, which covers Miami, Fort Lauderdale, and West Palm Beach.

Missing a deadline can result in an executory contract being deemed assumed, which could lock a debtor into continuing lease obligations they wanted to escape.

The 341 Meeting and Other Required Steps

Before a bankruptcy case is filed, a credit counseling course from an approved agency is required. After filing, a meeting of creditors, commonly called the 341 meeting, is held about one month later. In the Southern District of Florida, this meeting is routinely conducted by video or phone. For a detailed look at what to expect, see our post on the 341 meeting of creditors in Florida.

Before discharge is granted, debtors must also complete a debtor education course from an approved provider.

What About the Remaining Debt After Rejection?

Once a lease is rejected and the case moves toward discharge, the damage claim left behind by the rejection is typically treated as a general unsecured claim. Most general unsecured claims are dischargeable in bankruptcy.

Some debts survive discharge, including most student loans, recent income taxes, domestic support obligations, and court fines. Equipment lease rejection damages generally do not fall into those categories, but every situation is different.

Past results do not predict future outcomes.

Understanding the Costs of Filing

Filing bankruptcy involves court filing fees and, in most cases, attorney fees. Attorney fees, court costs and filing fees are explained in writing before any case begins. If cost is a concern, there are also provisions for fee waivers in qualifying cases. You can learn more in our post on bankruptcy filing fees and waivers.

A Path Forward for South Florida Restaurant Owners

Carrying a restaurant equipment lease on closed or struggling business can feel like an anchor. The Bankruptcy Code provides legal tools to address those obligations in an orderly way. Whether through Chapter 7, Chapter 13, or Subchapter V of Chapter 11, many restaurant owners in Miami, Fort Lauderdale, and across South Florida have used these tools to find a path forward.

Understanding your options is the first step.

Wondering if a fresh start fits your situation?

Attorney fees, court costs and filing fees are explained in writing before any case begins. Take the free 2-minute case review or call Recalde Law Firm at (305) 792-9100.