"Assuming" a Vehicle Lease in Chapter 7

 Posted on January 27, 2017 in Vehicle Loans

You can most likely “assume” your vehicle lease and keep that vehicle under Chapter 7. But you need to be current or able to be quickly.

We've talked about unexpired leases and how they’re treated in a Chapter 7 “straight bankruptcy” case. Today we get into the most common big one—the vehicle lease.

More and More Vehicle Leases

In the five years from 2009 to 2014, the percentage of vehicle transactions that were actually leases went from about 17% to 27%.

Why this strong trend? No doubt there are lots of reasons. But people seem to fixate more on the monthly payment amount than anything else, which usually favors leases. Vehicle manufacturers have capitalized on this in their advertising. That month-to-month advantage often comes with the disadvantage of higher overall costs.

In any event, when money’s tight and you need reliable transportation, leasing may really be your only feasible option.

Keeping Your Vehicle in Bankruptcy

If you do have a lease and need to keep your leased vehicle, you likely can do so in bankruptcy. Today blog post describes how this can happen in a Chapter 7 case. Tomorrow’s will be about Chapter 13 “adjustment of debts.”

The Trustee’s Role

As described in our last post two days ago, the Chapter 7 trustee has a possible but unlikely say here. In very rare situations a vehicle lease can be sold for money. But it’s simply not likely that you got such a sweet deal that somebody would pay you to take over your lease. However, if you did your trustee could possibly sell off the lease and pay the proceeds to your creditors. Talk with your bankruptcy lawyer to make sure this highly unlikely situation does not apply to your lease.

“Assuming” a Vehicle Lease

In the very likely event that your trustee would have no interest in your lease, you can usually “assume” it. You start by formally informing your lessor of your intention. Through your lawyer you complete a “Statement of Intention,” checking the box that you want to “assume” the lease.

By doing this you say that you want to be bound by all the terms of the lease contract. That of course includes your obligation to pay the monthly lease payments. But it also includes all the other terms, including various potential extra fees for high mileage and such.

Your lawyer files the Statement of Intention at the bankruptcy court and mails a copy to your lessor.

Your Lessor’s Acceptance

Your lessor has to consent to you “assuming” the lease. (Section 365(p)(2) of the Bankruptcy Code.) It will likely consent, especially if you are current on the lease, or can get current quickly. Vehicle leases are usually profitable for lessors, and they’d rather keep making money instead of ending the lease.

But again, the lessor is not legally obligated to allow you to assume the lease. Be sure to talk to your lawyer about your particular lessor’s practices so you know what to expect.

Warning

Make sure you are clear about the risks of “assuming” the lease.

If you ever can’t make the monthly lease payments after “assuming” the lease, the lessor can take back the vehicle.

If you continue to owe anything under the lease, which is very likely, the lessor would almost certainly sue you for it. The amount owed would likely be large, including various penalties and charges added to your account.

Even if you paid off the required lease payments, you could still owe a bunch of money. At the end of the lease term, the lessor could well charge you for excess mileage or vehicle “damage.” You could owe thousands of dollars, and be sued if you did not quickly pay it.

Conclusion

For sure sometimes keeping a leased vehicle in bankruptcy makes sense. But make sure it really does. Don’t give up the opportunity to get out of a dangerous deal without being well informed.

Review the lease contract carefully with your lawyer if any of it isn’t clear. Figure out as much as you can whether you would owe anything at the completion of the lease term. For example, compare your current mileage with the amount allowed in the contract, projecting out your likely mileage amount at the end of the lease, and see if that results in a likely penalty.

Last thing: if you aren’t current or close to current on your payments, consider Chapter 13 as potentially better option. Again, that’ll be the topic of our next blog post.