Although Chapter 7 can work fine if you’re current on your lease, use Chapter 13 instead if you’re behind and need time to catch up.
Keeping a Leased Vehicle under Chapter 7
A couple days ago we wrote about keeping a leased vehicle through a Chapter 7 “straight bankruptcy” case. That requires formally “assuming” the lease and getting your lessor to go along with that.
The lessor is not likely going to go along with the “assumption” if you’re behind on the lease payments, and can’t catch up right away. Even if you’re now current but have had a weak payment history, the lessor may be reluctant to continue the lease.
Two Situations for “Assuming” a Lease under Chapter 13
First, as stated in our introductory sentence, Chapter 13 gives you much more time to get current if you’re behind. A Chapter 13 case takes much, much longer than a Chapter 7 one—usually 3 to 5 years instead of just 3 to 4 months. Being in a bankruptcy case that long may seem like a disadvantage. But since you are significantly protected from your lessor during that time, it can be a huge advantage. You usually can get so much more time to cure any missed payments. That can enable you to keep your leased vehicle when you otherwise simply could not afford to do so.
The second situation for “assuming” a vehicle lease is if you want to keep that vehicle and have unrelated reasons for being in a Chapter 13 case. You can often deal much better in Chapter 13 with income taxes and divorce-related debts, for example. It also gives you amazing tools for addressing home mortgage(s) and/or another vehicle’s secured debt. So if you’ve decided to file a Chapter 13 case for reasons nothing to do with the vehicle lease, it’s good to know that Chapter 13 allows you to “assume” your vehicle lease.
How to “Assume” Your Lease under Chapter 13
“Assume” the lease by formally proposing to do so within your Chapter 13 payment plan. Section 1322(b) of the Bankruptcy Code states what a Chapter 13 plan may do. Subsection 1322(b)(7) says that a plan “may provide for the assumption… of any executory contract or unexpired lease of the debtor… .”
Your bankruptcy lawyer prepares your payment plan stating whether you are current on the lease payments. If so, you’ll just continue making your monthly lease payments. If you’re behind, your plan will say how much you are behind and your proposed terms for catching up.
The lessor, the Chapter 13 trustee, and your other creditors have the opportunity to review your proposed plan’s terms. They can raise objections. But if you and your lawyer initially put the plan together well, there may be no objections. If, however, any objections are raised, they can usually be resolved through negotiation. For example, you can curing the missed payments faster (by perhaps delaying payment to other creditors).
Assuming that things go as they should, the bankruptcy judge issues an order “confirming,” or officially approving, the plan. Your vehicle lease is then “assumed.” It continues in effect, along with all of its terms, for the life of the lease.
Be aware that the Chapter 13 trustee technically has the right to “assume” a vehicle lease before you do, but only if the lease has such extraordinarily favorable terms that it could be sold and transferred to someone else to make money for your other creditors. That is extremely seldom the case, especially in a consumer bankruptcy case. Check with your bankruptcy lawyer to be sure that’s not your situation.