The Extraordinary Tools of Bankruptcy: Getting Out of Your Vehicle Lease through Chapter 13
Chapter 7 gets you out of a vehicle lease quite cleanly. But if you have to file a Chapter 13 case for other reasons that can work, too.
The last blog post was about how a Chapter 7 “straight bankruptcy” enables you to escape a financially hurtful car or truck lease by discharging (permanently writing off) whatever liability would arise from surrendering that car or truck. Whether you end a vehicle lease early or at the end of its term, you could owe thousands of dollars. So if you decide that you don’t want to hang onto your leased vehicle, and have sufficient reason to file bankruptcy, Chapter 7 would probably be the cleanest way to go.
But you may need to file a Chapter 13 “adjustment of debts” case for a reason or reasons unrelated to the vehicle lease—to save your home, pay child or spousal support arrearage, pay income taxes, do a “cramdown” on a separate vehicle loan, or other good reasons. If so, you can surrender your leased vehicle and discharge the debt through Chapter 13 as well. Discharging that debt is not as straightforward as under Chapter 7, but would usually work with this same crucial result: you would owe nothing at all on the vehicle once your bankruptcy case is finished.
Debts from Surrender of Your Leased Vehicle
You could owe a variety of kinds of debts after surrendering a leased vehicle. If you surrendered it before the end of the lease, you could be liable for early termination penalties and/or all the contractual lease payments you did not pay through the end of the lease term. If you surrendered the vehicle at the end of the lease, you could be liable for high mileage, excessive wear and tear, or a difference between the vehicle’s anticipated value at the end of the contract and the actual “realized value.” Either way the amount you would owe could be many thousands of dollars.
Rejecting Your Vehicle Lease in Chapter 13
Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing with the lease. We’ll discuss how to continue with your lease in the next blog post. For today let’s assume that you no longer need or want to keep and pay for the vehicle.
If you reject the lease, you return the vehicle to the creditor and you no longer need to pay the monthly lease payments. If you are behind on those payments, you don’t have to catch up.
However, your creditor can file an unsecured claim with the bankruptcy court to try to get paid a portion of whatever you would owe for surrendering the vehicle—the kinds of potential debts mentioned above. These debts would be added to your other “general unsecured” debts.
“General Unsecured” Debts in Chapter 13
Under Chapter 13, your debts are divided into several categories, one of which is the “general unsecured” category. General unsecured debts are those debts that are not secured by any of your property or possessions (as is a mortgage, for example), and are also not designated as a “priority” debt (as are certain income tax debts).
Often you must pay the entire amount you owe on your secured and priority debts, but that’s seldom the case with “general unsecured” debts. How much you must pay on these kinds of debt—including on the debts related to your surrendered leased vehicle—depends on a lot of factors.
Instead of explaining how all these factors come together, be aware that in many—and perhaps most—Chapter 13 cases, what you owe from surrendering your leased vehicle has NO EFFECT on how much you must pay out in your Chapter 13 case. In other words, adding what you owe on the lease to your other “general unsecured” debts does not change the total amount that you pay to your “general unsecured” debts as a pool.
How could that be?
First, in some jurisdictions, you are allowed to pay 0% of your “general unsecured” debts, if all of your “disposable income” during your 3-to-5-year Chapter 13 case goes to secured and priority creditors instead. 0% of the “general unsecured” debts means 0% of those debts get paid, no matter how much of that debt there is.
Second, in many circumstances you would pay to the pool of your “general unsecured” creditors a certain amount of money, so that adding more debt to that pool—the debt related to the surrendered leased vehicle—simply shifts around the money you pay on debts within that pool without changing the total amount paid.
In a Chapter 13 case you don’t just quickly discharge the “general unsecured” debt arising from your surrendered vehicle lease as in a Chapter 7 case. You would likely have to pay part of that debt, at the same percentage as your other “general unsecured” debts. But in many situations that would not cost you any more than if you had no debt from the vehicle lease. Find out from your bankruptcy attorney how much, if at all, you would be paying from the surrender of your leased vehicle.