The Surprising Benefits: Keeping Your Vehicle Lease Under Chapter 7

 Posted on October 29, 2018 in Chapter 7

When financial hardship strikes and bankruptcy becomes necessary, many people assume they will lose everything they currently have, including their leased vehicle. However, Chapter 7 bankruptcy law contains provisions that might surprise you. Assuming you successfully finish the bankruptcy case, you will forever discharge (legally write off) any unsecured debt you would otherwise owe.

In many cases, you can also keep your vehicle lease and continue driving the same car you had before filing. Depending on your circumstances, you can do this by "assuming" the lease in a Chapter 7 case. Understanding these options can make a significant difference in maintaining stability during an already challenging time. An experienced New Braunfels, TX Chapter 7 bankruptcy attorney can help you keep your car lease in Chapter 7.

How Does Chapter 7 Bankruptcy Treat Vehicle Leases?

Chapter 7 bankruptcy, often called liquidation bankruptcy, eliminates most unsecured debts like credit cards and medical bills. When it comes to secured debts and contracts like vehicle leases, the situation becomes more complex. A vehicle lease is essentially a contract whereby you pay monthly payments to use a car for a specified period. Unlike ownership, you do not build equity in the vehicle, but you also have different options when facing bankruptcy.

The bankruptcy code treats vehicle leases as executory contracts, meaning both you and the leasing company still have obligations to fulfill. This classification creates unique opportunities that many people do not realize exist. Rather than automatically losing your vehicle, you have choices that can help you maintain transportation while getting a fresh financial start.

When you file for Chapter 7 bankruptcy, you must disclose all your debts and contracts, including any vehicle lease. The bankruptcy trustee and the court will then look at your lease and determine what should happen next. You will generally have three options: rejecting the lease, negotiating new terms on the lease (in some cases), or assuming 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 — or forever write off — any financial obligations on that contract. This is one of the most valuable tools available in Chapter 7 bankruptcy. It allows you to keep driving your current vehicle while eliminating other debts that may have been overwhelming your budget.

How Can You Assume Your Vehicle Lease?

To assume a lease, you must be current on your payments or catch up on any missed payments. The court requires that you demonstrate your ability to continue making future lease payments. This requirement protects both you and the leasing company by ensuring the arrangement remains viable. Once approved, you continue making your regular monthly payments as if the bankruptcy never happened, at least regarding your vehicle lease.

Technically speaking, you formally make a choice whether or not to assume the lease in Chapter 7 bankruptcy when filling out court documents prepared by your bankruptcy attorney. In the "Statement of Intention for Individuals Filing Under Chapter 7," you list your "unexpired personal property leases." After writing the name of the lessor (the entity leasing you the car) there is a simple question: "Will the lease be assumed?" Check the "Yes" box. Your bankruptcy lawyer files this form at the bankruptcy court and delivers a copy to the lessor. You and your lawyer must file this document within 30 days of filing your bankruptcy petition. It is often filed with your initial bankruptcy petition and the rest of your documents at the beginning of your case.

What Are the Potential Consequences of Assuming the Lease?

After completing the assumption process, you get stability during a turbulent time. You keep the same vehicle, maintain the same payment schedule, and avoid the stress of finding new transportation. This continuity can be especially valuable if you depend on your vehicle for work, family obligations, or medical appointments.

However, while assuming the lease can be a wonderful opportunity, keep in mind that it carries some risks and potential consequences. If you assume the lease but fail to make the monthly payments at a future time, the lessor could take back the vehicle and potentially even 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 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. That is why it is important to carefully discuss this decision with your bankruptcy attorney.

What Happens If You Reject the Lease?

Surprisingly, rejecting your vehicle lease in Chapter 7 can sometimes work in your favor. When you reject a lease, you terminate the contract and return the vehicle to the leasing company. While this might sound negative, rejection can provide significant financial relief if your lease payments are too high for your post-bankruptcy budget.

After rejection, any remaining lease obligations become unsecured debt that gets eliminated in your bankruptcy discharge. This means you walk away from potentially thousands of dollars in remaining lease payments without owing anything to the leasing company. The financial freedom this creates can be substantial, especially if you had several years remaining on an expensive lease.

Rejection also allows you to start fresh with transportation that better fits your new financial situation. You might choose to buy a less expensive used car, lease a more affordable vehicle, or even rely on public transportation temporarily. The key advantage is having the choice to make decisions based on your actual needs rather than being locked into a contract that no longer makes financial sense.

Call a New Braunfels, TX Chapter 7 Bankruptcy Attorney

If you are filing for Chapter 7 bankruptcy and concerned about how it could impact your car lease, speak to the experienced Boerne, TX Chapter 7 bankruptcy attorney. At the Law Offices of Chance M. McGhee, Attorney Chance McGhee can advise you on how to keep your lease and whether this is the best option for you. Call the law firm at 210-342-3400 for a free consultation.