Keeping Your Leased Vehicle through Chapter 7

 Posted on May 04, 2016 in Vehicle Loans

If current or able to get current on your vehicle lease payments, you’ll likely be able to keep that vehicle in a Chapter 7 case.

A week ago we told you about keeping your purchased vehicle in a Chapter 7 “straight bankruptcy” through a “reaffirmation agreement.” But if you’ve leased your vehicle instead of buying it on credit, then that “reaffirmation” option doesn’t apply to you.

But if you do want and need to keep your leased vehicle, you will likely be able to do so under either the Chapter 7 or Chapter 13 procedures. Today we tell you about how this works under Chapter 7. Tomorrow we’ll get into Chapter 13 “adjustment of debts.”

Offering to “Assume” the Vehicle Lease

When you file a Chapter 7 case, you formally inform your vehicle lease creditor (the “lessor”) that you want to keep the vehicle by completing a form called the “Statement of Intention.” On that form you check the box saying that you want to “assume” the unexpired personal property lease.

By doing this you are saying that you want to keep on making the lease payments. You are also saying that you want to be bound by all the other terms of the lease contract. In effect you are giving notice that you want the lease to continue as if you had not filed bankruptcy.

Your attorney files that completed document at the bankruptcy court and mails a copy to your lessor.

(Technically the bankruptcy trustee has an initial right to “assume” the lease but this will virtually never happen with a consumer vehicle lease.)

The Lessor’s Willingness to Let You “Assume”

Your lessor then informs you whether it is willing to have you “assume” the lease. See Section 365(p)(2) of the Bankruptcy Code. Especially if you are current on the lease, or very close to it, the lessor will very likely accept your request. Vehicle leases are usually quite profitable for lessors. So yours would likely rather lock in more profits rather than take back the vehicle and have to write off its losses.

However, be aware that under Chapter 7 the lessor does not have to let you assume the lease. Talk with your attorney about the history of your lessor’s practices if you have concerns about this.

Make Sure You Really Need to Keep the Leased Vehicle.

Think long and hard about whether you should keep and “assume” the lease.

This is your one-time opportunity to get out of the lease contract without owing anything. Discuss the consequences of assuming the lease thoroughly with your attorney.

If, after assuming the lease, you would be unable to make the monthly lease payments for any reason, the lessor would have the right to repossess the vehicle. This is no different than before you filed for bankruptcy.

Possible Debts from Your Vehicle Lease

The lessor could and almost certainly would sue you for the amount you still owe on the lease contract after you had assumed the lease, failed to make all the required payments, and the lessor took back the vehicle. That amount owed would likely be substantial because it can include a variety of penalties and charges added to your account.

And even if you did succeed in making all the required lease payments, you’re still not necessarily home free. At the end of the lease term, long after your Chapter 7 case is over, the lessor could well charge you large fees for excess mileage or damage to the vehicle, again just as if you hadn’t filed bankruptcy. You could owe thousands of dollars, and be sued if you did not quickly pay it.

No Equity in a Leased Vehicle

Regardless whether you would or would not OWE anything at the end of the lease term, you would definitely not OWN anything. You would have no equity in the vehicle. You would have no vehicle for a trade-in to purchase another vehicle. And you can’t count on the creditor at that point allowing you to buy the same vehicle on a purchase contract.

Hanging onto a Leased Vehicle Sometimes Makes Sense

To be sure, in some situations keeping a leased vehicle is sensible and appropriate. But before you do this, make sure you understand what would happen if you were not able to keep up the payments.

Make a point of sitting down with your attorney with the lease contract in front of you. Determine as much as possible whether you would likely owe anything at the completion of the lease term. For example, compare the mileage you’ve accrued thus far with what you are allowed in the contract, and try to estimate that up through the end of the lease.

Again, this is your opportunity to avoid future debt from that lease, so don’t pass that up without having your eyes open wide about your risks.

If You Are Not Current

If you want to keep your leased vehicle and are not current on the payments, one of two things would likely happen. Either your lessor won’t agree to allow you to assume the lease, or more likely will agree to do so only if you immediately bring the late payments current.

If you can’t get current right away—while at the same time being confident about also making the monthly payments on time—seriously consider whether it’s really wise to keep the vehicle.

Chapter 13?

If you really do need to keep the vehicle and are not current, look into the Chapter 13 procedure instead of Chapter 7. You’d have at least a few months to make up those missed payments, and potentially have other benefits. More about this in the next blog post.