If you are not current on your leased vehicle but want to keep it, file a Chapter 13 case if you can’t bring the account current right away.
Lease Assumption under Chapter 7
Our last blog post was about keeping a leased vehicle by “assuming” the lease in a Chapter 7 “straight bankruptcy” case. Assuming a lease means that that you intend to keep making the lease payments and that you are willing to be legally bound by all the other terms of the lease contract. You are agreeing to have the lease continue as if you had not filed bankruptcy.
But assuming a vehicle lease in a Chapter 7 case does not make sense if you are behind on your lease payments, and have no way to catch up right away. You’d be setting yourself up to have the creditor seize the vehicle and then come after you for a substantial amount of damages.
Chapter 13 “adjustment of debts” gives you more time to catch up on any missed payments, and so it is the focus of today’s blog post.
Lease Assumption under Chapter 13
If you decide to keep your leased vehicle by assuming the lease, then the Chapter 13 plan that you and your attorney propose to the bankruptcy court will have a provision saying so.
If you are current, you will propose to maintain the monthly payments. If you are not current, your plan will state how you intend to get current, while at the same time maintaining the monthly lease payments.
If no one objects—neither the lease creditor, any other affected creditor, nor the Chapter 13 trustee—and the bankruptcy judge finds the plan acceptable, he or she will order the plan “confirmed,” or approved.
Depending on the practices of your local Chapter 13 trustee and bankruptcy court, you will pay the lease payments (and any arrearage payments) either directly to the creditor or through the “plan payments” sent to the trustee (along with all the other debts being paid through the plan).
The Lease Terms Remain in Effect
With a vehicle lease there is no opportunity for a Chapter 13 “cramdown”—a potential reduction in monthly payments and/or in the total amount to be paid. Other than being given a few months to catch up on any back lease payments, vehicle leases are a take-it-or-leave-it proposition even in Chapter 13.
This means that if your proposed lease assumption is “confirmed” by the bankruptcy judge, at the end of the lease term you could owe money for high mileage or extra wear and tear. And if you couldn’t keep up the monthly lease payments before getting to the end of the lease term, you’d lose the vehicle and owe additional penalties for early termination of the lease. This could also jeopardize the successful completion of your Chapter 13 case and whatever else it was trying to accomplish with debts other than the vehicle lease.
Chapter 13 Practicalities
If your Chapter 13 plan lasts longer than the lease term, this creates some extra challenges. At the end of the vehicle lease term you would normally return the vehicle, or else perhaps finance its purchase at that point.
But if done in the midst of a Chapter 13 case, first, the creditor may be less inclined to finance the purchase because of your pending Chapter 13 case. Second, you must get approval from the Chapter 13 trustee and bankruptcy court for any new use of credit. You may be able to overcome both of these challenges, but they should both be thought about when the decision to file Chapter 13 is made instead of years later when the lease is about to expire.