If you file a Chapter 7 case and write off your other debts, will you want to keep your vehicle lease? You can if you’re current on it now.
Our last three blog posts have been about rejecting a vehicle lease and giving the vehicle back to the lessor. You can do this either through Chapter 7 or 13. The result is the same in the end. Assuming you successfully finish the bankruptcy case, you’ll forever discharge (legally write off) any debt you’d owe afterwards.
But you can also usually keep a leased vehicle. Depending on your circumstances, you can “assume” the lease in either a Chapter 7 or 13 case. Today’s blog post is about how this works in a Chapter 7 case. Next week we get into keeping a leased vehicle in a Chapter 13 one.
“Assuming” Vehicle Lease
When you file bankruptcy you make a formal choice about whether or not you want to “assume” the lease. Assuming an unexpired lease generally allows you to keep the vehicle while continuing to be legally bound by the lease contract. You give up the option to reject the lease and discharge—forever write off—any financial obligations on that contract. (Section 365(a) of the U.S. Bankruptcy Code.)
The “Statement of Intention”
To formally assume the lease in a Chapter 7 “straight bankruptcy” case you say that’s want you want to do in the court documents your bankruptcy lawyer prepares for you. In the “Statement of Intention for Individuals Filing Under Chapter 7” “List Your Unexpired Personal Property Leases” (on page 2). After stating your lessor’s name and the vehicle being leased, there’s a simple question: “Will the lease be assumed?” Check the “Yes” box. Your bankruptcy lawyer files this Statement of Intention at the Bankruptcy Court (electronically). He or she also delivers a copy of to the lessor. (See Bankruptcy Rule 1007(b)(2).)
You and your lawyer must file this document within 30 days of filing your bankruptcy petition. Often it’s filed with your initial bankruptcy petition and the rest of your documents at the beginning of your case.
Consequences of Assuming the Lease
Be fully aware of the potential consequences before you assume the lease. Filing a Chapter 7 case gives you the opportunity to cancel your lease contract without owing anything. Assuming the lease gives up that opportunity.
If you assume and then in the future you couldn’t make the monthly lease payments, the lessor would take back the vehicle. Then the lessor could sue you for the amount you still owe on the lease contract.
Even if you make all the required monthly payments, you may still owe money at the end of the lease. You could owe substantial charges for excess mileage or damage to the vehicle. You could potentially owe thousands of dollars, and again be sued if you did not pay.
There are situations when it makes sense to keep a leased vehicle by assuming the lease in bankruptcy. But be sure you think about the benefits of getting out of the lease, and understand the risks.
When Chapter 13 Helps You Keep Your Leased Vehicle
In a Chapter 7 case you should generally be current on the monthly payments in order to assume the lease. If you’re not current, be sure that you can immediately get current. If you can’t, the lessor will very likely not allow you to assume the lease.
If you are behind but definitely want to keep the leased vehicle, Chapter 13 may be your better option. It usually gives you much more time to catch up on the missed payments. That’s the topic of our next blog post.