Getting Out of Your Vehicle Lease through Chapter 13

 Posted on May 11, 2016 in Vehicle Loans

If you are filing a Chapter 13 case for other reasons, it’s also a good opportunity to get rid of your vehicle lease if you want to do so.

Our last blog post was about how a Chapter 7 “straight bankruptcy” allows you to get out of a car or truck lease by discharging (permanently writing off) whatever liability would arise from surrendering that car or truck.

Whether you end a vehicle lease early or at the end of its term, you could still owe the lessor thousands of dollars in a combination of contractual fees. If you decide that you need to file bankruptcy, Chapter 7 is likely the cleanest and quickest option.

But you may instead need to file a Chapter 13 “adjustment of debts” case for reasons nothing to do with the vehicle lease. You may want to save your home, catch up on child or spousal support arrearage, pay income taxes while being protected from the IRS or the state, or do a “cramdown” on a separate vehicle loan, for example. These could all be good reasons, along with many others, to file a Chapter 13 case.

You can surrender your leased vehicle and discharge the debt through Chapter 13 at the same time. Discharging that debt is not as straightforward as under Chapter 7, but would leave you with the same result: you would owe nothing at all on the vehicle once your bankruptcy case is finished.

Debts from Returning Your Leased Vehicle

Without bankruptcy, you could owe a variety of kinds of debts after giving back a leased vehicle.

If you surrendered it before the end of the lease, you could be liable for early termination penalties and any monthly lease payments you are behind on at the time.

If you surrendered the vehicle at the end of the lease, you could be liable for high mileage, excessive wear and tear, or a difference between the vehicle’s anticipated value at the end of the contract and the actual “realized value.”

Either way the amount you would owe could be thousands of dollars.

“Rejecting” Your Vehicle Lease in Chapter 13

Under Chapter 13 you have the options of either “assuming” (continuing with) the lease or “rejecting” it and returning the vehicle. In a blog post last week we explained how to “assume” your lease.

If instead you no longer want to keep and pay for the vehicle you include a statement in your Chapter 13 plan that you are “rejecting” the lease. You return the vehicle to the lessor and no longer need to make the monthly lease payments. If you are behind on those payments, you don’t have to catch up.

“General Unsecured” Debts in Chapter 13

However, your creditor can file a “proof of claim” with the bankruptcy court to try to get paid a portion of whatever you would owe for surrendering the vehicle—the kinds of contractual fees and charges mentioned above. That claim would be included in the list of your “general unsecured” debts owed to your creditors.

In a Chapter 13 case your “general unsecured” debts are one of several categories of debts. They are “unsecured” in that they are no long secured by any property, since you are surrendering the vehicle. They are “general” in that they are not designated as a "priority" debt, which are favored ones (such as certain income tax debts).

Often you must pay all or most of your secured and “priority” debts, but that’s seldom the case with “general unsecured” ones. How much you must pay on these kinds of debt—including on the debts related to your surrendered leased vehicle—depends on a lot of factors.

The Remaining Lease Debt Often Does Not Increase What You Pay

Without getting into all those factors here, in most Chapter 13 cases the amount you owe from surrendering your leased vehicle does not add ANYTHING to the amount you pay in your Chapter 13 payment plan.

How does that happen? It happens in two circumstances:

1. In many parts of the country you are allowed to pay nothing to ANY of your “general unsecured” debts. That’s referred to as a “0% plan.” This happens because all of your available “disposable income” during your 3-to-5-year Chapter 13 case instead goes to secured creditors (such as a home mortgage, or vehicle or furniture loans) and/or “priority” creditors instead (such as income taxes and child or spousal support arrearage). Since you are paying 0% on all your “general unsecured” debts, that means that you’re paying 0%—nothing—on your remaining vehicle lease debt as well.

2. Even in those more common Chapter 13 plans in which the “general unsecured” debts ARE being something instead of nothing, the existence of the leased vehicle debt usually does not increase how much you pay over the life of your case. That’s because most of the time you end up paying a fixed amount into the pool of your “general unsecured” creditors. That amount is essentially what your budget shows that you can afford to pay over the life of your case, minus whatever is going to the secured and priority creditors. So as a result adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts.

Conclusion

In a Chapter 13 case you don’t quickly discharge the “general unsecured” debt arising from your surrendered vehicle lease as you would in a Chapter 7 case. You would likely have to pay part of that debt, at the same percentage as your other “general unsecured” debts.

But sometimes you pay 0% on those “general unsecured” debts, including on the remaining vehicle lease debt. More often you pay some percentage of this pool of debts. But usually that doesn’t actually cost you any additional month, because it just reduces how much other “general unsecured” debts are paid.

Then at the successful completion of your Chapter 13 case, whatever would be left owing on the vehicle lease debt is forever discharged, and you owe nothing.