Keeping a vehicle in bankruptcy is mission critical. Clients often ask if their car is safe in bankruptcy or if they have to list the debt.
When it comes to vehicle leases that concern intensifies since a consumer has fewer rights. Buying a car is similar to marriage, but leases are more like friends with benefits.
AUTO LEASES IN CHAPTER 7:
There are basically two options for car leases in Chapter 7: the lease may be assumed or rejected. Most clients elect to continue the lease agreement, and as long as the vehicle loan is paid current and insurance is in place, the leasing company usually agrees to continue the contract.
If the lease is a burden to the debtor it may be rejected. This can be done formally with written notice to the creditor or it may be accomplished by not signing an assumption agreement. A lease agreement is deemed rejected unless a agreement to continue the lease is filed with the bankruptcy court within 60 days after the case is filed.
Keep in mind that assuming a vehicle lease in Chapter 7 is voluntary on the part of the debtor and the bank. The bank is not required to offer a lease assumption agreement, but they generally do if the loan is current.
AUTO LEASES IN CHAPTER 13:
Auto leases may be retained in a Chapter 13 case or rejected. Generally speaking, a debtor has more power to keep a lease agreement in Chapter 13, especially if the payments are in default.
Assuming a lease in Chapter 13 requires that delinquent payments be cured in short period of time. The debtor must file a payment plan with the court that formally assumes or rejects the lease. If the plan is silent on whether the agreement is being continued, it is deemed rejected 60 days after the case is filed.
The tougher question is whether it is wise to keep a lease that will expire in the middle of the chapter 13 case. When the lease is over the vehicle must be returned and the debtor must find a replacement. It can be very difficult to find a bank willing to extend credit in the middle of chapter 13, and if they do extend credit it is generally at a higher rate of interest.
You need to plan for what happens when the lease expires in the middle of the chapter 13 case. Do you throw the dice and gamble that you can get financing for a replacement vehicle when the lease expires, or do you surrender the vehicle at the beginning of the bankruptcy? This is a key item to plan.
LEASE OPTION TO PURCHASE VEHICLE:
Most lease agreements allow the debtor to buy the vehicle at the end of the lease. The purchase price is usually set at the vehicle’s estimated value at the end of the lease. However, most lease options provide that the purchase price must be paid in full immediately in one lump-sum payment.
Outside of bankruptcy, most banks will finance the lease option balloon payment, but that is not the case in the middle of chapter 13. In the middle of Chapter 13 cases banks rarely finance the balloon payment. So, the debtor has to be prepared to deal with this problem.
CAN THE LEASE PURCHASE OPTION PRICE BE PAID THROUGH A CHAPTER 13 PLAN?
May a debtor finance the lease purchase option through the Chapter 13 Plan? In a word, no. Although I have seen this done once in a Nebraska bankruptcy case and once in a Florida case, this only worked because the creditors did not pay attention to the chapter 13 plan and it got approved. A debtor cannot force the lender to accept payments on the lease option purchase price.
WHAT HAPPENS IF THERE IS A LEASE PAYMENT DEFAULT DURING THE CHAPTER 13 PLAN?
If a debtor defaults on the chapter 13 payment then the bankruptcy trustee will not be able to pay the regular car lease payment as well. Such a default will give the lender the ability to repossess the vehicle during the chapter 13 case after obtaining court permission. This can be quite a problem since a debtor must continue to pay the unpaid lease balance even if the vehicle is repossessed. (See In re Masek). Once a debtor agrees to assume a lease in a chapter 13 case they must pay off the lease in full, whether the car is repossessed or not. For this reason, one has to be very careful about assuming a lease in chapter 13.
Image courtesy of Flickr and Spanish Coches.