What happens to your car lease in Chapter 7 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 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 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 would only assume the lease if this 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 within 60 days after the case is filed, then the lease is deemed rejected. 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. 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 the case is filed. 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 unsecured debt is generally dischargeable in your bankruptcy. (To learn how unsecured debts are treated in Chapter 7, 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 may no longer be in your best interest.
If you assume the car lease, then the lease continues in full force and effect, as written. To assume the car lease you must notify the car lessor in writing. The car lessor is not required to respond, but it might.
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 then notify the car lessor in writing that the lease is in fact assumed.
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, then it 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 may have already 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.