When Your Lessee Files Bankruptcy in California

A borrower’s bankruptcy filing triggers the automatic stay and stops every collection effort against the debtor and its property (11 U.S.C. § 362(a)). It does not end your recovery. What you can recover, and how fast, depends on decisions made in the first weeks of the case in California’s Central, Eastern, Northern, or Southern District bankruptcy court.

First question: true lease or security interest?

Bankruptcy treats a true lease and a disguised security agreement very differently. California applies the Commercial Code test (Com. Code § 1203). A transaction is a security interest, not a lease, if the lessee cannot terminate it and any of the following is true: the term equals or exceeds the equipment’s remaining economic life; the lessee must renew for the economic life or become the owner; or the lessee may renew for the economic life, or buy the equipment, for nominal consideration. A $1-out lease is a security interest. A fair-market-value lease is usually a true lease, but debtors challenge that label when the purchase option price is low relative to expected value.

If it is a true lease

  • The debtor must assume or reject the lease. In Chapter 7, a personal property lease not assumed within 60 days is deemed rejected (11 U.S.C. § 365(d)(1)).

  • In Chapter 11, the debtor must perform its lease obligations that arise from 60 days after the filing until it assumes or rejects, unless the court orders otherwise (11 U.S.C. § 365(d)(5)).

  • To assume, the debtor must cure defaults and give adequate assurance of future performance (11 U.S.C. § 365(b)).

  • On rejection, you recover the equipment and file an unsecured claim for damages. Postpetition use can support an administrative expense claim.

If it is a security interest

Your claim is secured only to the value of the equipment; the rest is unsecured (11 U.S.C. § 506(a)). Valuation becomes the fight. Bring evidence early: appraisals, auction results, telematics hours, and condition reports. A debtor’s Chapter 11 plan, including a Subchapter V plan, can restructure the secured claim over your objection only if it pays the present value of the collateral with an adequate interest rate (11 U.S.C. §§ 1129(b)(2)(A), 1191). In Chapter 13, the interest rate on a crammed-down claim follows Till v. SCS Credit Corp. (2004) 541 U.S. 465. Object to low valuations and below-market rates; those two numbers set your recovery.

Relief from stay

Move for relief from the automatic stay when your interest in the equipment lacks adequate protection, or when the debtor has no equity in it and does not need it for an effective reorganization (11 U.S.C. § 362(d)). Depreciating equipment in daily use, uninsured equipment, and missed adequate protection payments support the motion. Where relief is not granted, ask for adequate protection payments and proof of insurance.

File the proof of claim on time

In Chapter 7 and Chapter 13 cases, a proof of claim is generally due 70 days after the petition date (Fed. R. Bankr. P. 3002(c)). In Chapter 11, the court sets the bar date. Attach the EFA or lease, the UCC-1, and the payment history, and state the secured and unsecured portions.

Guarantors are not protected by the borrower’s stay

The automatic stay protects the debtor, not its guarantors. The Chapter 13 co-debtor stay applies only to consumer debts (11 U.S.C. § 1301), so it does not shield a guarantor of a business equipment loan. Keep pursuing guarantors while the borrower’s case proceeds. If a guarantor files, consider a nondischargeability complaint based on a false written financial statement (11 U.S.C. § 523(a)(2)(B)), due within 60 days after the first date set for the meeting of creditors (Fed. R. Bankr. P. 4007(c)).

Bad-faith filings

Some borrowers file to stop a writ of possession or a bank levy, with no realistic plan. Move to dismiss or convert for cause (11 U.S.C. §§ 707, 1112(b)), or seek relief from stay to recover the equipment.

First-week checklist

  • Confirm the chapter, the district, and the deadlines from the court’s notice.

  • Stop all collection activity against the debtor.

  • Locate and inspect the equipment; confirm insurance.

  • Decide true lease or security interest, and prepare for that fight.

  • Calendar the proof-of-claim bar date and the nondischargeability deadline.

  • Keep pursuing non-debtor guarantors.

Grant, Kessler & Zunshine represents equipment finance lenders and lessors in California, on contingency. See how we handle equipment finance collections, or call (619) 233-7078.

This article provides general information, not legal advice, and reflects California law as of October 2026. Prior results do not guarantee a similar outcome. Grant, Kessler & Zunshine, APC, 1331 India Street, San Diego, CA 92101.

Alexander J. Kessler