If you are current on your leased vehicle, you can likely keep it in a Chapter 7 “straight bankruptcy.” If not current, you need Chapter 13.
Our last two blog posts have been about escaping a financially damaging vehicle lease by surrendering the vehicle and then, through bankruptcy, discharging (permanently writing off) whatever liability that would arise from that surrender.
But now we write about keeping the vehicle. Today, about doing so in a Chapter 7 case, and in the next blog about keeping a leased vehicle in a Chapter 13 “adjustment of debts” case.
Choosing to “Assume” the Vehicle Lease
When you file a Chapter 7 case, you formally inform your vehicle lease creditor that you want to keep the lease by completing a form called the “Chapter 7 Individual Debtor’s Statement of Intention.” Through that form you indicate that you want to keep on making the lease payments and 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.
You must do this within 30 days of filing your bankruptcy petition. If you don’t, you will lose the protection against collection actions by your lease creditor that filing the Chapter 7 case provided to you. So that creditor would have the right to take the vehicle away from you.
Consequences of Assuming the Lease
Think long and hard about whether you should assume the lease. Be aware that this is your one-time opportunity to get out of the lease contract without owing anything. Discuss thoroughly the consequences of assuming the lease with your attorney.
If after assuming the lease for whatever reason you could no longer make the monthly lease payments, the creditor would have the right to repossess the vehicle, just like before you filed for bankruptcy. Also, the creditor could sue you for the amount you still owe on the lease contract.
Even if after assuming the lease you succeeded in making all the required payments, at the end of the lease term the creditor could well charge you substantial 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 for it if you did not pay it.
Even if you would owe nothing at the end of the lease term, you would also own nothing. You would have no vehicle for a trade-in to purchase another vehicle. And you certainly can’t count on the creditor at that point allowing you to buy the vehicle on a purchase contract.
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. And particularly try to determine as well as possible whether you would likely owe anything at the completion of the lease term (based on your past and anticipated accrual of mileage, for example). Again, this is your opportunity to avoid these kinds of future debts, so don’t pass up this opportunity 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, don’t assume the lease in a Chapter 7 case unless you can immediately get current. If you can’t get current right away—while at the same time being confident about resuming the monthly payments on time, and then making the monthly lease payments steadily throughout the rest of the lease term—think again about the wisdom of assuming the lease.
If you have enough regularity in your income to make those monthly payments consistently, but just can’t make up the missed payment or two, Chapter 13 may well make more sense. You’d have at least a few months to make up those missed payments. More about that in our next blog post.