What happens to your car lease in Chapter 7 bankruptcy depends on whether you are behind on your payments and what the bankruptcy trustee decides to do with the lease. The trustee can assume the car lease (keep it alive to benefit your creditors) or reject it (terminate it). If the trustee wants to reject the lease, you can either continue with the lease or give up the car. But before making any permanent decisions, you should decide whether keeping the vehicle is affordable.
Once you've learned what will happen to your car lease in bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.
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 7 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 the 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 bankruptcy. If the trustee assumes the lease, the lease continues to be enforceable as written. The trustee would only assume the lease if this would monetarily benefit the bankruptcy estate. For example, if the trustee could lease the vehicle to someone else for more money than the lease payment and the estate would gain income, the trustee might decide to assume the lease. If the estate would not benefit from assigning the lease, the trustee will reject the lease, stating that the lease is not an asset of the estate.
If the trustee does not assume the lease within 60 days after you've filed your case, the lease is deemed rejected. At that point, the automatic stay ends.
If the bankruptcy trustee rejects the lease, you can "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 usually indicate your preference when you fill out your bankruptcy papers. You do this on Schedule G -- Executory Contracts and Unexpired Leases. You must also list the car lease on the bankruptcy form titled Chapter 7 Individual Debtor's Statement of Intention under Part B – "Personal property subject to unexpired leases." On this form, you must state the car lessor's name, a description of the property, and whether you will assume the lease. You must provide a copy of this form to the trustee and the car lessor.
If you want to surrender the car, you must do so no later than 45 days after you file the case. Once you surrender the vehicle, either voluntarily or involuntarily after the court lifts the automatic y, the creditor will sell it and then apply the proceeds, minus administrative fees, to the balance owed. If the sale proceeds don't pay off the loan balance, the remaining amount owed is an unsecured debt. Most of the time, the unsecured debt is dischargeable in your bankruptcy. (To learn how unsecured debts are treated in Chapter 7 and read about exceptions to the dischargeablity rule, see Secured v. Unsecured Debt in Chapter 7.)
If you want to assume the lease, 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 might no longer be in your best interest.
If you assume the car lease, the lease continues in full force and effect, as written. You must notify the car lessor in writing to assume the car lease. The car lessor is not required to respond, but it might.
When the car lessor says yes. The car lessor may notify you that it will allow you to assume the lease. If so, it can require you to cure any outstanding defaults. After 30 days, you should notify the car lessor in writing that the lease is assumed.
When the car lessor says no. If the car lessor does not agree to your assuming the lease, or you cannot work out an agreement on this issue, the lessor can pursue its remedies under state law (usually, that means repossession of the car).
If the car lessor does not respond. If the car lessor does not respond, you should not rely on its silence as an agreement to continue with the lease. The car lessor might have decided to pursue its remedies under state law.
If you assume the lease, what happens if you can't make payments in the future? Some bankruptcy courts have decided that unless you sign and file a valid reaffirmation agreement regarding the car lease, you are not liable for future unpaid amounts on the car lease, and the debt is discharged. To learn more, see Reaffirmation Agreements in Chapter 7.
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