Keeping Your Leased Vehicle through Chapter 13
Want to keep your leased vehicle but aren’t current on the payments? File a Chapter 13 case if you can’t get 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 formally committing to keep making the lease payments. You also commit to be legally bound by all the other terms of the lease contract. You want the lease to continue as if you had not filed bankruptcy.
Problems with “Assumption”
However, “assuming” a vehicle lease in a Chapter 7 case doesn’t work if you’re behind on lease payments and don’t have the means to catch up right away. The lease creditor (the “lessor”) may well be unwilling to let you “assume” the lease. Or it will condition your ability to do so on your immediate payment of all the arrearage. You’d be setting yourself up to being unable to “assume” the lease and losing the vehicle.
The Chapter 13 “Adjustment of Debts” Solution
The Chapter 13 option gives you much more time to catch up on any missed payments. So it can enable you to keep your vehicle when Chapter 7 would not do so.
Chapter 13 is a completely different kind of procedure, with a whole set of advantages and disadvantages. For one, it takes a whole lot longer—usually 3 to 5 years instead of Chapter 7’s 3 to 4 months. Nevertheless saving your leased vehicle may be reason enough to choose to do Chapter 13, once you understand all of its pluses and minus.
Lease “Assumption” under Chapter 13
If you were to keep your leased vehicle through Chapter 13, here’s how it would work.
You would “assume” the lease by formally proposing to do so within your Chapter 13 payment plan. See Section 1322(b)(7) of the Bankruptcy Code. Your attorney puts that plan together with you. You review, approve and sign it, and it’s filed electronically with your other documents at the bankruptcy court.
If you are current on the lease payments, your Chapter 13 payment plan will say so. If you are not current, your plan will state how much you are behind. It will propose the terms by which you would catch up, as you also keep making the regular monthly lease payments.
Paying these should be much easier than before filing the Chapter 13 case because usually you would be paying much less each month to your creditors overall. It’s often much less than what you would otherwise be obligated. The amount you pay to all creditors each month is based on what you can afford to pay.
After you propose your Chapter 13 plan, the lessor, the Chapter 13 trustee, and your other creditors will have the opportunity to review your proposed plan’s terms. They can raise objections. If the plan is put together well, there may well be no objections. Or if there is an objection, it can usually be resolved—for example, by adjusting the terms for curing the late payments. Assuming that things go as they should and any objections are taken care of, the bankruptcy judge reviews the payment plan and issues an order stating that the plan is “confirmed,” or officially approved.
The Lease Terms Remain in Effect
With a vehicle loan, under some circumstances you may be able to lower your monthly payment through “cramdown.” There is NO such possibility with a vehicle lease. Other than being given more time to catch up on any back lease payments, you must either “assume” or “reject” a vehicle lease and all of its terms, even in Chapter 13.
This means that once your proposed lease assumption is approved in your Chapter 13 plan, the lease continues in force. So, just like normal, at the end of the lease you could owe money for high mileage, for example.
And if you couldn’t keep up the monthly lease, you could lose the vehicle and owe additional penalties for early termination of the lease. You and your vehicle ARE given additional protections from repossession during the Chapter 13 procedure. You are also given the opportunity to adjust your Chapter 13 plan if your financial circumstances change. But “assumption” of your lease means that you are accepting it, with terms that must be complied with if you want to keep the vehicle.