What happens to my car lease in bankruptcy?
If you lease your car instead of owning and financing it, bankruptcy treats this automobile lease obligation differently than a secured car installment loan. In bankruptcy, leases are either assumed or rejected. An assumed lease continues on its own terms, while a rejected lease ends. In event of rejection, the car will be returned to the creditor for sale.
Rejection of Car Lease
If a debtor wishes to get out of the lease and turn in the car, rejection of the lease under either chapter 7 or chapter 13 is an option. This rejection ends liability on the lease. The balance owed on the lease becomes a general unsecured claim in the bankruptcy case, which will be normally wiped out by the bankruptcy discharge. The lease claim would receive payment, if at all, on a proportional basis with other unsecured creditors, such as credit card lenders. The debtor will lose possession of the car with rejection of the lease.
Assumption under Chapter 7
Individual debtors are permitted to assume personal property leases, such as those for cars, in chapter 7. The debtor may be required to cure any past-due balance in order to assume the lease. To assume a lease, a debtor must follow proper procedures in a timely manner, so it is important that debtor communicate his or her desires to his or her bankruptcy attorney.
Assumption under Chapter 13
Chapter 13 debtors can provide for assumption of a car lease in their chapter 13 plan. A lease would ordinarily be paid separate from the chapter 13 plan payments. If the lease is in default, it may be possible to cure the default if payments can be made promptly.
Limitations for Car Leases in Bankruptcy
Bankruptcy does not normally provide an opportunity to re-work a car lease. Bankruptcy assumption and rejection are fairly black and white. The debtor either walks away from the lease contract or carries forward with it as written. This includes the lease term. It's not unusual for the remaining lease term to be shorter than that of a chapter 13 plan. Chapter 13 debtors usually do not have the ability to purchase a car with cash, so would need financing to replace the leased vehicle at expiration. Therefore, debtors with expiring leases should anticipate the need to seek court approval to finance a car during their plans.