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Archive for the ‘Vehicles’ Category

Chapter 7 vs. 13 When Your Vehicle is Worth Too Much

January 19th, 2018 at 8:00 am

Usually your car or truck is protected in bankruptcy with a vehicle exemption. Or if the vehicle is worth too much Chapter 13 can protect it.  

 

How Chapter 7 and Chapter 13 affect your vehicle and vehicle loan can determine which of these options you choose. That’s why we’ve focused the last several blog posts on the differences between these options. We’ve especially looked at reaffirming a vehicle loan in Chapter 7 vs. cramming it down in Chapter 13. Depending on your circumstances one of these is likely a safer and/or less expensive way to keep your vehicle.

But there is another consideration we don’t want to lose sight of. What if you have too much value in your car or truck? What if you either own it free and clear or else it has lots of equity? What if you’re not worried about your lender but rather with the bankruptcy trustee taking your car or truck?

Exemption for Your Vehicle

Why would a bankruptcy trustee be interested taking your vehicle?

Actually, most of the time the trustee wouldn’t be. You are allowed to keep a certain amounts of value or equity in your possessions when filing bankruptcy. These allowances are called “exemptions.” Each state has different exemption amounts for different possession or asset categories. Often their exemption systems are quite different, not just in the amounts protected but also in how they work otherwise. 

With vehicles, often you are allowed a certain exempt dollar amount per vehicle. But in some states there’s a larger catch-all exemption category that your vehicle(s) can fit into along with other assets. Sometimes that catch-all amount changes depending on whether you are exempting your home. The bottom line is usually there’s no problem because your vehicle(s) is (are) fully exempt.

A bankruptcy trustee is only interested in taking your vehicle if it’s worth more than the allowed exempt amount. Or sometimes a vehicle will not qualify for the exemption so it’s not protected at all—such as if you have more than one vehicle.

Vehicle Value or Equity

To be practical, if you owe on your vehicle most likely you don’t have too much equity in it. The part you owe on the vehicle doesn’t count. It’s subtracted from the value. If you owe $10,000 on a vehicle worth $13,500, and you have a $4,000 exemption, you’re fine. Subtract the $10,000 you owe, which leaves $3,500 of equity, which is more than covered by the allowed $4,000 exemption.

Be careful if you are close to paying off your car or truck. You’re then more likely to have too much equity.

Also make sure the debt against your vehicle is a legally valid one. Your creditor must have a “perfected security interest” on your vehicle. This means that it went through all the necessary legal steps to put a legally enforceable lien on your vehicle. Otherwise the debt does not count against the value of your vehicle. That puts it at greater risk that it’s not fully exempt.

Similarly, you need to be careful if the lien was placed on your vehicle too recently. Problems can also arise if the lien was placed too long after you incurred the loan. Under certain such circumstances the bankruptcy trustee can remove a lien from the vehicle. That could mean that the vehicle has more equity than the exemption can protect.

Chapter 7 vs. 13 If Too Much Value or Equity

Whenever your vehicle(s) has (have) too much value or equity, you can protect that otherwise non-exempt portion through Chapter 13. Sometimes you can protect it in a Chapter 7 case, too, but it’s riskier.

Here’s how these work.

Starting with Chapter 7, let’s assume your vehicle is worth $1,500 too much. Say it’s worth $5,500 and the applicable exemption is $4,000, leaving $1,500 unprotected. In a Chapter 7 case the trustee could take that vehicle, sell it, pay you the $4,000 exempt portion and use the remaining $1,500 to pay your creditors. 

But in many situations a Chapter 7 trustee would consider not taking such a vehicle but instead negotiating with you. If you agreed to pay that same $1,500 that the trustee would get, you could keep the vehicle.  You’re saving the trustee the hassle of selling your vehicle while he or she distributes the same amount of money to your creditors. It’s not unusual for trustees to even accept monthly payments. The agreed amount does need to be paid off relatively quickly, usually within several months.

If the unprotected amount is too large for you to pay quickly, then Chapter 13 gives you much more time. Let’s now assume that the vehicle is worth $5,000 too much. Say it’s worth $9,000, the applicable exemption is $4,000, leaving the difference, $5,000, unprotected. (Remember again that your state’s vehicle exemption amount will likely be different.)

You and your bankruptcy lawyer simply have to structure your Chapter 13 plan to pay an extra $5,000 over its 3-to-5-year span. Paying for that unprotected value or equity in your vehicle is spread out over that multi-year period. Also, sometimes you’re not actually paying more than you would have otherwise. That’s if some or all of that $5,000 is going to pay special debts like income taxes that you had to pay anyway.

So, with Chapter 13 you can spread your protection payments over a much longer period of time. And sometimes the extra protection money you pay goes to pay debts you’d have to pay anyway.

 

Chapter 7 Buys Very Short Amount of Time to Get Vehicle Insurance

November 3rd, 2017 at 7:00 am

Chapter 7 stops a repossession of your vehicle for lapsed insurance, but almost always the amount of time it buys you is very short. 

 

Our last blog post went through a list of ways Chapter 7 buys you time with your vehicle lender. Included in that list was that it gives you “a very limited time to reinstate required vehicle insurance.” This deserves more attention.

Vehicle Insurance Required

According to Minimum Car Insurance Requirements by State, a recent article in nerdwallet.com, almost every state’s laws require vehicle owners to have at least a certain dollar amount of liability insurance coverage. That covers damages that you cause in an accident. The one state that doesn’t require liability coverage is New Hampshire. There are other exceptions. In Virginia drivers with a clean driving record can drive without liability insurance by simply paying an annual fee. In Arizona and some other states you can avoid liability insurance by providing a bond, certificate of deposit, or cash to the DMV.

According to this wallethub.com article 15 states also require personal injury protection (PIP) insurance. That covers medical expenses from an accident, for you, household members, and your passengers, regardless of fault. Also, 21 states require uninsured and underinsured motorist coverage. This covers you when you’re harmed by someone with no insurance or an insufficient amount.   

Your vehicle lender or lessor requires two other kinds of insurance to protect your vehicle, its collateral.  Collision insurance covers your vehicle in an accident. Comprehensive insurance covers it in events other than an accident, such as theft and fire.

The Urgency of Vehicle Insurance Coverage

Vehicle lenders and lessors get extremely concerned if your insurance coverage lapses. That’s because then at any moment their collateral could be totaled and turn worthless.

If you miss a payment deadline, the lender/lessor is only out a few dollars. But if you have no insurance it’s potentially out the entire loan/lease balance.

This is why as part of your loan or lease agreement:

  • you must maintain insurance throughout the term of your loan or lease
  • your lender/lessor must be named in your insurance as a loss payee (it gets paid if your vehicle is damaged)
  • the collision and comprehensive coverages must be enough to cover the vehicle’s full value, with limited dollar amount deductibles
  • if your insurance ever lapses the lender/lessor can “force-place” insurance and make you pay for it.

 (For example, see this Wells Fargo Dealer Services “agreement to furnish insurance; also this webpage from the federal Consumer Financial Protection Bureau about force-placed insurance.)

As a result of such contractual requirements your lender/lessor can legally repossess your vehicle whenever your insurance coverage lapses.  

Buying You Time in Chapter 7

The moment you file a Chapter 7 “straight bankruptcy” case through your bankruptcy lawyer your vehicle is protected by the “automatic stay.” See Section 362 of the U.S. Bankruptcy Code. This prevents your lender/lessor from repossessing your vehicle. That’s true whether you’re behind on monthly payments or your insurance has lapsed.

So if your vehicle insurance has lapsed before filing your Chapter 7 case, that filing buys you some time to get the insurance reinstated. But, as the title to this blog post says, it usually only buys you a very short amount of time.

Why’s that? It’s because the lender/lessor’s concern about losing its collateral is a legitimate one. The bankruptcy court respects that concern.  Lapsed insurance will encourage the lender/lessor to quickly file a motion with the court for “relief from the automatic stay.” That is a formal request to be able to repossess the vehicle, in this case for lack of insurance. The court will grant that motion unless you’ve reinstated insurance by the time the court hears the motion. So filing bankruptcy may only buy you a few more days or a couple weeks to get insurance.

Also, in the meantime the lender/lessor can force-place its own insurance on your vehicle. It adds the cost of this insurance to your balance, and it’s astoundingly expensive. Furthermore, force-placed insurance only protects the lender. You’re still violating state law by driving uninsured. And of course driving without insurance is extremely risky. Plus this cost will significantly increase the amount you need to pay to get current.

Conclusion

Filing a Chapter 7 bankruptcy will prevent your vehicle from being repossessed for lapsed insurance. But the amount of time the filing buys before you need to reinstate the insurance is quite short. Plus the force-placed insurance will make catching up on your loan/lease cost you much more. So, stopping a repossession for lapsed insurance can be great, but the amount of time it buys you for this violation of your vehicle loan/lease is very limited.

 

Escaping a Vehicle Lease in Chapter 13

February 3rd, 2017 at 8:00 am

Getting out of a vehicle lease by “rejecting” it in Chapter 13 isn’t quite as quick as in Chapter 7 but has about the same practical effect.

 

Getting out of Your Lease in Chapter 7 vs. Chapter 13

Two days ago we discussed how a Chapter 7 “straight bankruptcy” gets you out of a car or truck lease. It discharges (permanently writes off) whatever debt you’d have from surrendering that car or truck.

When you get out of a vehicle lease you often owe money to the lessor; sometimes a lot of money. That can be true whether you break the lease early or get to the end. Either way you could owe the lessor thousands of dollars in contractual fees.

Once you’ve decided that you need to file bankruptcy, and that you want to get out of the vehicle lease, as long as you qualify for Chapter 7 and it’s the best option overall, you can almost always discharge all the debts arising from the lease. A Chapter 7 case is likely the easiest and quickest option.

But for many reasons a Chapter 13 “adjustment of debts” case may be the better way to go.

First, you may not qualify for Chapter 7 based on your income and expenses under the “means” test.

Second, more likely you’re filing under Chapter 13 because it’s simply be the better option. It gives you tools to meet important financial goals, tools unavailable under Chapter 7.  You can often protect an asset that would be at risk of being taken by a Chapter 7 trustee. Chapter 13 provides numerous ways to preserve precious collateral on your secured debts, such as your home or vehicle (beyond the leased one). Sometimes you can keep your home/vehicle while paying less than you’d pay under Chapter 7. Chapter 13 can also protect you while you catch up on child or spousal support arrearage, or on income taxes. You pay or catch up on these special debts while making payments based on your realistic budget.  These are just some of the good reasons to file a Chapter 13 case, unrelated to your vehicle lease.

The Chapter 13 Option

Whether you’re filing a Chapter 13 case because you don’t qualify under Chapter 7 or because Chapter 13 is better all around, you can surrender your leased vehicle and discharge the debt. Discharging—legally writing off—that debt is not as straightforward as under Chapter 7. But it almost always leaves you with the same result. You would owe nothing at all on the vehicle lease once your bankruptcy case is finished.

“Rejecting” Your Vehicle Lease

Under Chapter 13 you can either “assume” (continue with) the lease or “reject” it and return the vehicle. Two blog posts we explained how to “assume” your lease and keep your leased vehicle.

But to instead get out of your lease through your bankruptcy lawyer you simply state in your Chapter 13 that you are “rejecting” the lease. Arrangements are made to return the vehicle to the lessor.  You don’t make any more monthly lease payments, and if you’re behind you don’t have to catch up.

Whatever you owe on the contract—which may be a substantial amount—is then treated as a “general unsecured” debt.

Treatment of “General Unsecured” Debts

Debts are either “secured,” “priority,” or “general unsecured.” Your remaining lease debt fits in the third category. It is “unsecured” in that it’s no long secured by anything since you’ve surrendered the vehicle. It’s “general” in that it’s not a “priority” debt, which are favored ones (like child support and certain income taxes).

Your lessor would likely file a “proof of claim” with the bankruptcy court. That’s a statement asserting how much you contractually owe on the lease. Assuming it’s accurate and you don’t object to it, its amount is lumped in with all your other “general unsecured” debts.

In your Chapter 13 plan, usually you pay all or most of your secured and “priority” debts. But that’s very seldom true for the “general unsecured” ones. How much, if any, you pay on this category of debts depends on a lot of factors. Mostly it depends on your income and expenses, how much you have in secured and “priority” debts, and what, if anything, is left over for “general unsecured” debts in the period of time you’re in the Chapter 13 case.

Often the Lease Debt Has No Financial Effect

In many situations the existence of the lease surrender debt does not increase what you pay into your Chapter 13 payment plan.

How could that be? It happens in two circumstances, one less common, the other much more so.

1. You may be allowed to pay nothing at all to your “general unsecured” debts, a “0% plan.” This happens when all of your available “disposable income” during your 3-to-5-year Chapter 13 case get paid on secured debts (such as a home mortgage, or vehicle or furniture loans) and/or “priority” debts (such as income taxes and child or spousal support arrearage). If you pay 0% of your “general unsecured” debts, that means that you’re paying 0% of your vehicle lease debt.

2. The more common Chapter 13 plans are those in which you pay the “general unsecured” debts something instead of nothing, Still, the existence of the leased vehicle debt very often does not increase how much you pay into your plan. That’s because most of the time you pay a fixed amount on all of your “general unsecured” debts. That amount is essentially what your budget says you can afford to pay over the life of your case. So, as a result, adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts. You pay no more; the money going to the “general unsecured” debts just gets divided differently.

 

Escaping a Vehicle Lease in Chapter 7

February 1st, 2017 at 8:00 am

Vehicle leases are often not such a good deal. If you find out your isn’t, you can almost certainly “reject” that lease and pay no more. 

 

Our last two blog posts have been about how to keep your leased vehicle in a Chapter 7 or 13 bankruptcy case. But what if you don’t want to keep your lease? Vehicle leases are often not as good of a deal as you might have thought at the beginning. Bankruptcy gives you the rare and often valuable opportunity of getting out of your lease.

Today we talk about leaving your vehicle lease behind without owing anything on it through Chapter 7 “straight bankruptcy.” Our next blog post will be about how that works through Chapter 13 “adjustment of debts.”

Popular but Risky Vehicle Leases

We mentioned a couple blog posts ago that vehicle leases are getting more and more popular. In a recent 5-year span they increased from 17% to 27% of vehicle transactions. People clearly like the low money down and lower monthly payments that often come with leases.

But vehicle leases also often come with significant downsides.

Disadvantages

1. Unlike a vehicle loan, at the end of the lease term you OWN nothing. Once you pay off a vehicle loan and you have a free and clear car or truck. With that as a goal it’s more likely you’ll take better care of your vehicle. So you’ll then likely have it for years more while you pay no monthly payments. Instead, at the end of a lease you return the vehicle and have nothing. What seemed less inexpensive short-term usually ends up being much more expensive long-term.

2. You own no vehicle at the end of the lease so there’s no trade-in vehicle for your next vehicle purchase. You’d usually have to come up with a cash down payment, making a purchase more challenging. It’s unlikely that you’ve saved the money from the lower monthly lease payments to put into your next vehicle. As a result you may be stuck with getting into another vehicle lease, continuing the expensive cycle.  

3. If you put on more mileage than the contract allows you could owe substantial penalties at lease end. This can happen with more-than-normal interior or exterior wear and tear. Or you may have to pay extra if the vehicle simply depreciates more than the lessor anticipated.

4. Getting out of the lease before the end of the lease term is usually very expensive. It could easily cost several thousands of dollars. The amount you would owe would be based on the “realized value.” That’s the relatively low amount the lessor would get from selling the vehicle at an auto auction. The amount wouldn’t even be known until after you surrendered the vehicle.

Buying Your Leased Vehicle at the End of the Term

You might be able to finance the purchase of your leased vehicle at the end of the lease term. But you simply can’t count on it. You are stuck with the terms the creditor is willing to extend to you. If your credit isn’t the greatest, you could easily be denied. If you owe extra because of the contractual penalties referred to above, you’d be paying too much for that vehicle. Plus you’d be paying interest on that higher amount, further increasing your cost for the vehicle.

The Bottom Line

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. You have possession of the car while it’s depreciating the most. Then you have to surrender it, potentially paying extra to just to get out of the lease. Then without a trade-in vehicle this is often repeated with the next lease. So you’re continuously making payments, never owning a vehicle outright. It’s a continuously expensive cycle.

The Chapter 7 Discharge Solution

A Chapter 7 “discharge” can write off almost all vehicle lease obligations. Except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.

You may need to get out of the lease early because your circumstances have changed. You may no longer be able to afford the monthly lease payments. You may have fallen behind on those payments. You may just not need the vehicle any more or may need your money for more crucial expenses.

Or you may instead be at or near the end of your lease and owe or expect to owe high mileage or excessive wear and tear charges on the lease.

In all these situations you can get out of your vehicle lease and owe nothing to the lessor.

“Rejecting” the Lease

When your bankruptcy lawyer files your Chapter 7 case, you can either “assume” or “reject” the vehicle lease. “Assuming” the lease means keeping the vehicle and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and writing off all your financial obligations under the lease.

To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” Your lessor then has the right to accept back the vehicle. (Section 365(p)(1) of the U.S. Bankruptcy Code.) So you or your lawyer would make arrangements to make the timing convenient for you.

Then you wouldn’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.

 

“Assuming” a Vehicle Lease in Default in Chapter 13

January 30th, 2017 at 8:00 am

Although Chapter 7 can work fine if you’re current on your lease, use Chapter 13 instead if you’re behind and need time to catch up. 


Keeping a Leased Vehicle under Chapter 7

A couple days ago we wrote about keeping a leased vehicle through a Chapter 7 “straight bankruptcy” case. That requires formally “assuming” the lease and getting your lessor to go along with that.

The lessor is not likely going to go along with the “assumption” if you’re behind on the lease payments, and can’t catch up right away. Even if you’re now current but have had a weak payment history, the lessor may be reluctant to continue the lease.

Two Situations for “Assuming” a Lease under Chapter 13

First, as stated in our introductory sentence, Chapter 13 gives you much more time to get current if you’re behind. A Chapter 13 case takes much, much longer than a Chapter 7 one—usually 3 to 5 years instead of just 3 to 4 months. Being in a bankruptcy case that long may seem like a disadvantage. But since you are significantly protected from your lessor during that time, it can be a huge advantage. You usually can get so much more time to cure any missed payments. That can enable you to keep your leased vehicle when you otherwise simply could not afford to do so.

The second situation for “assuming” a vehicle lease is if you want to keep that vehicle and have unrelated reasons for being in a Chapter 13 case. You can often deal much better in Chapter 13 with income taxes and divorce-related debts, for example. It also gives you amazing tools for addressing home mortgage(s) and/or another vehicle’s secured debt. So if you’ve decided to file a Chapter 13 case for reasons nothing to do with the vehicle lease, it’s good to know that Chapter 13 allows you to “assume” your vehicle lease.

How to “Assume” Your Lease under Chapter 13

“Assume” the lease by formally proposing to do so within your Chapter 13 payment plan. Section 1322(b) of the Bankruptcy Code states what a Chapter 13 plan may do. Subsection 1322(b)(7) says that a plan “may provide for the assumption… of any executory contract or unexpired lease of the debtor…  .”

Your bankruptcy lawyer prepares your payment plan stating whether you are current on the lease payments. If so, you’ll just continue making your monthly lease payments. If you’re behind, your plan will say how much you are behind and your proposed terms for catching up.  

The lessor, the Chapter 13 trustee, and your other creditors have the opportunity to review your proposed plan’s terms. They can raise objections. But if you and your lawyer initially put the plan together well, there may be no objections. If, however, any objections are raised, they can usually be resolved through negotiation. For example, you can curing the missed payments faster (by perhaps delaying payment to other creditors).

Assuming that things go as they should, the bankruptcy judge issues an order “confirming,” or officially approving, the plan. Your vehicle lease is then “assumed.” It continues in effect, along with all of its terms, for the life of the lease.

Cautionary Note

Be aware that the Chapter 13 trustee technically has the right to “assume” a vehicle lease before you do, but only if the lease has such extraordinarily favorable terms that it could be sold and transferred to someone else to make money for your other creditors. That is extremely seldom the case, especially in a consumer bankruptcy case. Check with your bankruptcy lawyer to be sure that’s not your situation.

 

Getting Out of Your Vehicle Lease through Chapter 13

May 11th, 2016 at 7:00 am

If you are filing a Chapter 13 case for other reasons, it’s also a good opportunity to get rid of your vehicle lease if you want to do so.

 

Our last blog post was about how a Chapter 7 “straight bankruptcy” allows you to get out of a 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 still owe the lessor thousands of dollars in a combination of contractual fees. If you decide that you need to file bankruptcy, Chapter 7 is likely the cleanest and quickest option.

But you may instead need to file a Chapter 13 “adjustment of debts” case for reasons nothing to do with the vehicle lease. You may want to save your home, catch up on child or spousal support arrearage, pay income taxes while being protected from the IRS or the state, or do a “cramdown” on a separate vehicle loan, for example. These could all be good reasons, along with many others, to file a Chapter 13 case.

You can surrender your leased vehicle and discharge the debt through Chapter 13 at the same time. Discharging that debt is not as straightforward as under Chapter 7, but would leave you with the same result: you would owe nothing at all on the vehicle once your bankruptcy case is finished.

Debts from Returning Your Leased Vehicle

Without bankruptcy, you could owe a variety of kinds of debts after giving back a leased vehicle.  

If you surrendered it before the end of the lease, you could be liable for early termination penalties and any monthly lease payments you are behind on at the time.

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 thousands of dollars. 

“Rejecting” Your Vehicle Lease in Chapter 13

Under Chapter 13 you have the options of either “assuming” (continuing with) the lease or “rejecting” it and returning the vehicle.  In a blog post last week we explained how to “assume” your lease.

If instead you no longer want to keep and pay for the vehicle you include a statement in your Chapter 13 plan that you are “rejecting” the lease. You return the vehicle to the lessor and no longer need to make the monthly lease payments. If you are behind on those payments, you don’t have to catch up.

 “General Unsecured” Debts in Chapter 13

However, your creditor can file a “proof of claim” with the bankruptcy court to try to get paid a portion of whatever you would owe for surrendering the vehicle—the kinds of contractual fees and charges mentioned above. That claim would be included in the list of your “general unsecured” debts owed to your creditors.

In a Chapter 13 case your “general unsecured” debts are one of several categories of debts. They are “unsecured” in that they are no long secured by any property, since you are surrendering the vehicle. They are “general” in that they are not designated as a “priority” debt, which are favored ones (such as certain income tax debts).

Often you must pay all or most of your secured and “priority” debts, but that’s seldom the case with “general unsecured” ones. 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.

The Remaining Lease Debt Often Does Not Increase What You Pay

Without getting into all those factors here, in most Chapter 13 cases the amount you owe from surrendering your leased vehicle does not add ANYTHING to the amount you pay in your Chapter 13 payment plan.

How does that happen? It happens in two circumstances:

1. In many parts of the country you are allowed to pay nothing to ANY of your “general unsecured” debts. That’s referred to as a “0% plan.” This happens because all of your available “disposable income” during your 3-to-5-year Chapter 13 case instead goes to secured creditors (such as a home mortgage, or vehicle or furniture loans) and/or “priority” creditors instead (such as income taxes and child or spousal support arrearage). Since you are paying 0% on all your “general unsecured” debts, that means that you’re paying 0%—nothing—on your remaining vehicle lease debt as well.

2. Even in those more common Chapter 13 plans in which the “general unsecured” debts ARE being something instead of nothing, the existence of the leased vehicle debt usually does not increase how much you pay over the life of your case. That’s because most of the time you end up paying a fixed amount into the pool of your “general unsecured” creditors. That amount is essentially what your budget shows that you can afford to pay over the life of your case, minus whatever is going to the secured and priority creditors. So as a result adding more debt to that pool—the debt from the surrendered leased vehicle—simply reduces the money that would otherwise have gone to other “general unsecured” debts.  

Conclusion

In a Chapter 13 case you don’t quickly discharge the “general unsecured” debt arising from your surrendered vehicle lease as you would 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 sometimes you pay 0% on those “general unsecured” debts, including on the remaining vehicle lease debt. More often you pay some percentage of this pool of debts. But usually that doesn’t actually cost you any additional month, because it just reduces how much other “general unsecured” debts are paid.

Then at the successful completion of your Chapter 13 case, whatever would be left owing on the vehicle lease debt is forever discharged, and you owe nothing.

 

Getting Out of Your Vehicle Lease through Chapter 7

May 9th, 2016 at 7:00 am

A vehicle lease can cost you less up-front and each month, but is in reality very expensive. Bankruptcy is your way to break the contract.

 

The Big Disadvantages of Vehicle Leasing

Leasing has become an attractive way of getting into a new vehicle. The reasons seem sensible.  A vehicle lease often requires less money down, and the monthly payments are usually less than with a vehicle loan.

But like any deal that looks too good to be true, there’s a catch. In fact, there are several.

1. At the end of the lease term you own nothing. Pay off a vehicle loan and you have a free and clear vehicle for you to use for perhaps years more while not needing to make monthly payments. Instead, at the end of a lease you have nothing. And you have to figure out how to pay for another vehicle. So what seemed less inexpensive short-term ends up being more expensive long-term.

2. Because you have nothing at the end of a lease, you don’t have a used vehicle to use for part or all of a down payment. There’s a good chance that you haven’t used the lower monthly lease payments to save money for a cash down payment on your next vehicle. So you may well be induced to get into another vehicle lease, the continuation of an expensive cycle.  

3. If you end up driving the vehicle more than the contract allows you would be hit with very substantial penalties at the end of the lease. This can also happen if you have excessive wear and tear, on either the interior or exterior. You may even have to pay extra if the vehicle ends up having depreciated more than the lease creditor (the “lessor”) estimated at the beginning of the lease contract.

4. Getting out of the lease before the end of the lease term is usually tremendously expensive—often costing you several thousands of dollars. The amount you would owe would be based on the “realized value,” the relatively low amount the lessor would get from selling the vehicle at an auto auction, an amount that would not be known after you surrendered the vehicle.

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. That’s because you have possession of the car while it’s depreciating the most. Then you have to surrender it, and potentially even have to pay extra to just to get out of the lease. Then, without a trade-in vehicle, this is repeated with the next lease, so that you are continuously making payments, never to own a vehicle free and clear. It’s a continuous expensive cycle.

The Chapter 7 Discharge of Debts

A Chapter 7 “straight bankruptcy” can be your way out of this cycle.

“Discharge” is the legal write-off of a debt in bankruptcy. In a Chapter 7 case your debts are usually discharged within about four months of the filing of your case.

Vehicle lease obligations that you want to escape can almost always be discharged under Chapter 7. There are certain limited types of debts that are never discharged—such as unpaid child or spousal support. The discharge of other types of debts could be challenged by the creditor—such as debts incurred through fraud. So except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.

Discharge Early Termination or End-of-Lease Charges

You may need to escape the lease early because your circumstances have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve fallen behind on those payments. Or you may simply not need the vehicle any longer and need your money for more crucial expenses.

Or you may be at the end of your lease and owe for high mileage or excessive wear and tear on the vehicle.

In all these situations you can get out of your vehicle lease and not have to pay anything to the lessor.

“Rejecting” the Lease

When your Chapter 7 bankruptcy is filed, you have the option of either “assuming” or “rejecting” the vehicle lease. “Assuming” the lease means keeping the vehicle (if the lessor allows this) and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and discharging all of the lease’s financial obligations.

To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” This is sent to your lessor formally informing it that you want to terminate the vehicle lease.  

At the point when you “reject” your lease your lessor has the right to take back the vehicle. See Section 365(p)(1) of the U.S. Bankruptcy Code. So you or your attorney will usually make arrangements for that to happen in a way that is convenient for you.

Then you won’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.

 

Keeping Your Leased Vehicle through Chapter 13

May 6th, 2016 at 7:00 am

Want to keep your leased vehicle but aren’t current on the payments? File a Chapter 13 case if you can’t get current right away.

 

Lease “Assumption” under Chapter 7

Our last blog post was about keeping a leased vehicle by “assuming” the lease in a Chapter 7 “straight bankruptcy” case. “Assuming” a lease means formally committing to keep making the lease payments. You also commit to be legally bound by all the other terms of the lease contract. You want the lease to continue as if you had not filed bankruptcy.

Problems with “Assumption”

However, “assuming” a vehicle lease in a Chapter 7 case doesn’t work if you’re behind on lease payments and don’t have the means to catch up right away. The lease creditor (the “lessor”) may well be unwilling to let you “assume” the lease. Or it will condition your ability to do so on your immediate payment of all the arrearage. You’d be setting yourself up to being unable to “assume” the lease and losing the vehicle.  

The Chapter 13 “Adjustment of Debts” Solution

The Chapter 13 option gives you much more time to catch up on any missed payments. So it can enable you to keep your vehicle when Chapter 7 would not do so.

Chapter 13 is a completely different kind of procedure, with a whole set of advantages and disadvantages. For one, it takes a whole lot longer—usually 3 to 5 years instead of Chapter 7’s 3 to 4 months. Nevertheless saving your leased vehicle may be reason enough to choose to do Chapter 13, once you understand all of its pluses and minus.

Lease “Assumption” under Chapter 13

If you were to keep your leased vehicle through Chapter 13, here’s how it would work.

You would “assume” the lease by formally proposing to do so within your Chapter 13 payment plan. See Section 1322(b)(7) of the Bankruptcy Code. Your attorney puts that plan together with you. You review, approve and sign it, and it’s filed electronically with your other documents at the bankruptcy court.

If you are current on the lease payments, your Chapter 13 payment plan will say so. If you are not current, your plan will state how much you are behind. It will propose the terms by which you would catch up, as you also keep making the regular monthly lease payments.

Paying these should be much easier than before filing the Chapter 13 case because usually you would be paying much less each month to your creditors overall. It’s often much less than what you would otherwise be obligated. The amount you pay to all creditors each month is based on what you can afford to pay.

After you propose your Chapter 13 plan, the lessor, the Chapter 13 trustee, and your other creditors will have the opportunity to review your proposed plan’s terms. They can raise objections. If the plan is put together well, there may well be no objections. Or if there is an objection, it can usually be resolved—for example, by adjusting the terms for curing the late payments. Assuming that things go as they should and any objections are taken care of, the bankruptcy judge reviews the payment plan and issues an order stating that the plan is “confirmed,” or officially approved.

The Lease Terms Remain in Effect

With a vehicle loan, under some circumstances you may be able to lower your monthly payment through “cramdown.” There is NO such possibility with a vehicle lease. Other than being given more time to catch up on any back lease payments, you must either “assume” or “reject” a vehicle lease and all of its terms, even in Chapter 13.

This means that once your proposed lease assumption is approved in your Chapter 13 plan, the lease continues in force. So, just like normal, at the end of the lease you could owe money for high mileage, for example.

And if you couldn’t keep up the monthly lease, you could lose the vehicle and owe additional penalties for early termination of the lease. You and your vehicle ARE given additional protections from repossession during the Chapter 13 procedure. You are also given the opportunity to adjust your Chapter 13 plan if your financial circumstances change. But “assumption” of your lease means that you are accepting it, with terms that must be complied with if you want to keep the vehicle.

 

Keeping Your Leased Vehicle through Chapter 7

May 4th, 2016 at 7:00 am

If current or able to get current on your vehicle lease payments, you’ll likely be able to keep that vehicle in a Chapter 7 case.

 

A week ago we told you about keeping your purchased vehicle in a Chapter 7 “straight bankruptcy” through a “reaffirmation agreement.” But if you’ve leased your vehicle instead of buying it on credit, then that “reaffirmation” option doesn’t apply to you.

But if you do want and need to keep your leased vehicle, you will likely be able to do so under either the Chapter 7 or Chapter 13 procedures. Today we tell you about how this works under Chapter 7. Tomorrow we’ll get into Chapter 13 “adjustment of debts.”

Offering to “Assume” the Vehicle Lease

When you file a Chapter 7 case, you formally inform your vehicle lease creditor (the “lessor”) that you want to keep the vehicle by completing a form called the “Statement of Intention.” On that form you check the box saying that you want to “assume” the unexpired personal property lease.

By doing this you are saying that you want to keep on making the lease payments. You are also saying that you want to be bound by all the other terms of the lease contract. In effect you are giving notice that you want the lease to continue as if you had not filed bankruptcy.

Your attorney files that completed document at the bankruptcy court and mails a copy to your lessor.

(Technically the bankruptcy trustee has an initial right to “assume” the lease but this will virtually never happen with a consumer vehicle lease.)

The Lessor’s Willingness to Let You “Assume”

Your lessor then informs you whether it is willing to have you “assume” the lease. See Section 365(p)(2) of the Bankruptcy Code. Especially if you are current on the lease, or very close to it, the lessor will very likely accept your request. Vehicle leases are usually quite profitable for lessors. So yours would likely rather lock in more profits rather than take back the vehicle and have to write off its losses.

However, be aware that under Chapter 7 the lessor does not have to let you assume the lease. Talk with your attorney about the history of your lessor’s practices if you have concerns about this.

Make Sure You Really Need to Keep the Leased Vehicle.

Think long and hard about whether you should keep and “assume” the lease.

This is your one-time opportunity to get out of the lease contract without owing anything. Discuss the consequences of assuming the lease thoroughly with your attorney.

If, after assuming the lease, you would be unable to make the monthly lease payments for any reason, the lessor would have the right to repossess the vehicle. This is no different than before you filed for bankruptcy.

Possible Debts from Your Vehicle Lease

The lessor could and almost certainly would sue you for the amount you still owe on the lease contract after you had assumed the lease, failed to make all the required payments, and the lessor took back the vehicle. That amount owed would likely be substantial because it can include a variety of penalties and charges added to your account.

And even if you did succeed in making all the required lease payments, you’re still not necessarily home free. At the end of the lease term, long after your Chapter 7 case is over, the lessor could well charge you large fees for excess mileage or damage to the vehicle, again just as if you hadn’t filed bankruptcy. You could owe thousands of dollars, and be sued if you did not quickly pay it.

No Equity in a Leased Vehicle

Regardless whether you would or would not OWE anything at the end of the lease term, you would definitely not OWN anything. You would have no equity in the vehicle. You would have no vehicle for a trade-in to purchase another vehicle. And you can’t count on the creditor at that point allowing you to buy the same vehicle on a purchase contract.

Hanging onto a Leased Vehicle Sometimes Makes Sense

To be sure, in some situations keeping a leased vehicle is sensible and appropriate. But before you do this, make sure you understand what would happen if you were not able to keep up the payments.

Make a point of sitting down with your attorney with the lease contract in front of you. Determine as much as possible whether you would likely owe anything at the completion of the lease term. For example, compare the mileage you’ve accrued thus far with what you are allowed in the contract, and try to estimate that up through the end of the lease.

Again, this is your opportunity to avoid future debt from that lease, so don’t pass that up without having your eyes open wide about your risks.

If You Are Not Current

If you want to keep your leased vehicle and are not current on the payments, one of two things would likely happen. Either your lessor won’t agree to allow you to assume the lease, or more likely will agree to do so only if you immediately bring the late payments current.

If you can’t get current right away—while at the same time being confident about also making the monthly payments on time—seriously consider whether it’s really wise to keep the vehicle.

Chapter 13?

If you really do need to keep the vehicle and are not current, look into the Chapter 13 procedure instead of Chapter 7. You’d have at least a few months to make up those missed payments, and potentially have other benefits. More about this in the next blog post.

 

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