Personal Property Leases in Bankruptcy
Leases of consumer goods—furniture, appliances, electronics—are like vehicle leases: you can “accept” or “reject” them.
Our last 9 blog posts have been about vehicle leases and residential leases. How are leases of other kinds handled when you file a Chapter 7 or Chapter 13 case?
For example, if you didn’t buy but rather leased your living room furniture, what happens to the furniture in bankruptcy?
Real Estate vs. Personal Property
There are different rules in bankruptcy for real estate and residential rentals vs. those involving personal property. Personal property includes all property that isn’t real estate. It includes vehicles, furniture, computers, and pretty much anything you can touch (and some property you can’t touch!) as long as it isn’t real estate.
The rules about vehicle leases pretty much apply to other consumer personal property leases. We covered vehicle leases in four blog posts recently, published on the website from January 27 through February 3, 2017. Check them out if you want to.
Today we summarize those rules as applied to personal property leases other than vehicle leases, such as the rental of living room furniture mentioned above.
(Note: we use the terms “lease” and “rental” interchangeably—they pretty much mean the same thing for our purposes here.)
“Assumption” of Lease in Chapter 7
If you have an unexpired personal property lease and you want to keep the leased furniture or other personal property, when you file a Chapter 7 “straight bankruptcy” you almost always have the option of “assuming” the lease. This means that you agree to keep and remain bound by all of the terms of the lease.
By “assuming” the lease, of course you agree to continue being legally obligated to make the monthly lease payments. Less obviously, you also agree to pay whatever fees, expenses, or penalties that the lease requires.
Some of these other financial obligations may only apply if you fail to make the monthly lease payments. These include late fees and repossession charges. But some may apply even if you make the payments perfectly. For example, you may have to maintain property insurance or pay a cleaning fee at the end of the lease.
So, before “assuming” a lease in a Chapter 7 case, review the contract terms carefully with your bankruptcy lawyer to make sure you thoroughly understand you are again signing up for.
Lease “Assumption” in Chapter 13
This works similarly in an “adjustment of debts” Chapter 13 case, with some extra advantages for you.
If you are behind on your lease payments, Chapter 13 gives you more time and flexibility to catch up. Under Chapter 7 you essentially have a month or two to get current. If you don’t, you can’t assume the lease and keep the furniture or whatever else you’re leasing.
Having more time to catch up is especially helpful if you have other obligations that wouldn’t just go away in a Chapter 7 case. Debts like recent taxes or back child or spousal support, or if you’re behind on a mortgage or vehicle loan.
Chapter 13 can also be more flexible down the line. If you no longer want to keep the leased furniture or other leased item 6 months or even a year or two later because of changed circumstances, you can convert your case into a Chapter 7 one and likely discharge (legally write off) any remaining financial obligations on the lease.
“Rejection” of Lease in Chapter 7
In a Chapter 7 case you can decide that the leased furniture or other item is not worth keeping. Then you “reject” the lease and give back whatever you leased. Just about always your Chapter 7 case forever discharges whatever contractual debt remains from the lease.
You can choose to reject the lease because you can’t afford the payments any more. Or reject because you simply don’t want the furniture or whatever you’re leasing any more. You don’t need a reason. It’s simply your opportunity to get out of the lease if you want to without any financial cost.
Lease “Rejection” in Chapter 13
You have the same opportunity in Chapter 13 as well, with two twists worth mentioning.
First, as mentioned above, you may have more flexibility to “assume” the lease at first and then “reject” later. At that point you may be able to file an “amended Chapter 13 plan” and reject the lease then. However, that may leave you with some financially obligations on the lease. On the other hand your situation may have changed enough to justify converting your Chapter 13 case into a Chapter 7 one. Then you could very likely discharge any remaining liability on the lease.
Second, whatever liability remaining from the lease after your “rejection” would be treated as a “general unsecured” debt. Most Chapter 13 cases pay a certain percentage of their “general unsecured” debts. But because most plans pay only a set amount of money towards these debts over the life of the case, the remaining debt from the lease usually doesn’t increase the amount you have to pay. It just reduces how much your other “general unsecured” debts get paid while not changing how much you pay.