What happens to your car lease in Chapter 13 bankruptcy depends on whether you are behind on your payments and on what the bankruptcy trustee decides to do with the lease – the trustee can assume or reject the car lease. If the trustee does not want to “assume” the lease, you can choose to continue with the lease or give up the car. But before you make any decisions, you should decide whether keeping the vehicle is an affordable option.
When you file for bankruptcy, the automatic stay stops all collection actions, including efforts by a car lessor to repossess a leased car. (To learn more, see Bankruptcy’s Automatic Stay.) However, if you are behind on your car lease payments when you file for Chapter 13 bankruptcy, your car lessor will likely ask the court to lift (end) the automatic stay. It does this by filing a motion for relief from automatic stay. If the lessor is successful with this motion, it may pursue state law remedies to collect on the debt you owe, including repossession of your car.
The trustee may assume or reject a car lease in the bankruptcy. If the trustee assumes the lease, the lease continues to be enforceable as written. The trustee will only assume the lease if it would monetarily benefit the bankruptcy estate. For example, if the trustee would be able to lease the vehicle to someone else for more money than the lease payment and the estate would gain income, the trustee may decide to assume the lease. If there is no benefit to the estate, then the trustee will reject the lease, basically stating that the lease is not an asset of the estate.
If the trustee does not assume it before the plan is confirmed, then the lease is deemed rejected as of the conclusion of the confirmation hearing. At that point, the automatic stay ends.
If the bankruptcy trustee rejects the lease, you have the opportunity to “assume” (continue with) the lease, or end the lease and surrender the car.
Even though the bankruptcy trustee must first reject the lease before you can assume the lease or surrender the car, you must generally indicate your preference ahead of time in your bankruptcy papers. You do this on Schedule G -- Executory Contracts and Unexpired Leases.
Many courts require that if you want to surrender the car, you must do so no later than the plan confirmation date. If you decide that you want to surrender your car and the time period for the trustee to assume it has not yet passed, you should contact the trustee to request that the trustee go ahead and assume or reject the lease so that you may proceed.
Once you surrender the vehicle, either voluntarily or involuntarily after the stay is lifted, the creditor will sell it and then apply the proceeds, minus administrative fees, to the balance owed. If the sale proceeds do not pay off the balance of the loan, then the remaining amount owed is an unsecured debt. The creditor has the right, within certain time limits, to file an unsecured non-priority proof of claim for the balance owed. (To learn how unsecured, nonpriority debts are treated in Chapter 13, see Secured v. Unsecured Debt in Chapter 13.)
If you assume the car lease, then the lease continues in full force and effect and there is no discharge of the debt. If you are considering assuming the lease, you should review the written lease carefully to make sure you can still afford the terms. Many car leases contain undesirable clauses such as mileage limitations, odd term lengths, or residual or other fees that may no longer be in your best interest.
Some bankruptcy districts require you to make the payment through the Chapter 13 plan and some require that you pay the lender directly. If you do assume the lease, it is very important that during your Chapter 13 case you make your payments on a timely basis and keep your car insurance current.
After you complete your Chapter 13 bankruptcy plan, the lease continues in full force and effect as it did during the bankruptcy. If you are unable to pay on the lease and the vehicle is repossessed, you will be liable for any remaining debt.
To learn more about dealing with your car and other property during bankruptcy, check out our topic sections on Your Car in Bankruptcy and Your Property in Bankruptcy. If you need personalized advice, you'll want to talk to a bankruptcy lawyer.