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Archive for the ‘leases’ tag

The Surprising Benefits: Rejecting Your Vehicle Lease under Chapter 7

October 15th, 2018 at 7:00 am

Getting out of a vehicle lease in a Chapter 7 case requires simply that you formally state that you “reject” it. Then you owe nothing more.

 

Last week we showed how a vehicle lease can be unexpectedly expensive, and that you can escape through Chapter 7. Today we show you how.

The Option of “Rejecting” the Lease

When you file bankruptcy you get to choose whether or not to keep your leased vehicle. Specifically you choose to either “assume” or “reject” the lease. Assuming the lease means keeping the vehicle and continuing to be legally bound by all the terms of the lease. Rejecting the lease means letting the vehicle go. This allows you to “discharge”—forever write off—all of your financial obligations on the lease. (See Section 365 of the Bankruptcy Code generally about the assumption and rejection of unexpired leases. Warning: it’s very complicated and confusing!)

Rejecting a car or truck lease can be a good idea in various situations. As we discussed last week leases come with a number of hidden costs and financial risks.

If you can’t make the lease payments and surrender the vehicle, you will most likely owe a lot of money. Or if you’re nearing the end of your lease and the vehicle has high mileage or unusual wear and tear, you can also owe a lot. Rejecting your vehicle lease in bankruptcy at any point in the lease gets you out of it without having to pay anything more on it.

Giving Notice of Lease Rejection

To reject the lease, you simply state your intention to do so. You do that in the Chapter 7 documents that your bankruptcy lawyer prepares for you. The specific form is appropriately called the “Statement of Intention for Individuals Filing Under Chapter 7.” As you can see on the form itself, on page 2 you “List Your Unexpired Personal Property Leases.” (A vehicle is “personal property.”) So you state your lessor’s name and the vehicle being leased, and whether or not you’re “assuming” the lease. If you are not assuming it you are deemed to be rejecting it.

Your bankruptcy lawyer delivers a copy of the Statement of Intention to the lessor and the trustee. (See Bankruptcy Rule 1007(b)(2).)

Timing of the Statement of Intention

Your lawyer must file/deliver the Statement of Intention within 30 days after the filing of your Chapter 7 case. If your “meeting of creditors” happens to be before then, the deadline to file is the date of that “meeting.”

If you don’t file/deliver this form by this deadline the lessor can then immediately repossess the vehicle. In other words the protection against repossession—called the “automatic stay”—that you imposed by filing your case expires if you don’t file/deliver the Statement of Intention on time. (See Section 362(h)(1)(A) of the Bankruptcy Code.)

Often the Statement of Intention gets filed the day you file all your other documents. But your lawyer may wait until the later deadline to file to give you more time with your vehicle. That’s because the “automatic stay” also expires if you don’t “take timely the action specified in such statement.” (Section 362(h)(1)(B).)

The Lessor’s Reactions

At any point your lessor may file a motion asking for permission to take possession of the vehicle. This is also called a motion for relief from the automatic stay or to lift the automatic stay. The faster the lessor gets possession the faster it can resell it and recoup some of its losses. So sometimes a lessor will file such a motion to make sure it gets possession as fast as the law allows.  

But often a lessor just relies on your Statement of Intent and the expiration of the automatic stay as described above. It doesn’t file a motion but just communicates with your lawyer to arrange for your surrender of the vehicle at a time that is reasonable for both you and the lessor.

So, talk with your bankruptcy lawyer, both about whether you should reject your lease, and how to best do so.

 

The Surprising Benefits: Escape from Your Vehicle Lease in Bankruptcy

October 8th, 2018 at 7:00 am

Leasing a vehicle is tempting because it seems to be the less expensive way to go. But it’s often MORE expensive. Escape through bankruptcy. 

 

The Temptation of a Vehicle Lease

Leasing can seem like a sensible way to get a new vehicle. You often pay less money down and pay lower monthly payments. So leasing can sometimes be a way to get reliable transportation for less money. At least in the short term.

The Hidden Economic Costs

But there are hidden costs.

First, at the end of your lease term you own nothing. Your payments don’t create any ownership.  They give you nothing more than immediate possession.

At the end of the lease you don’t have a free and clear vehicle as you do after paying off a vehicle loan. You don’t have a vehicle free of monthly payment for a few years after pay-off. Instead of a free and clear vehicle at the end of the contract you’re stuck with figuring out how you can afford another vehicle.

Second, at the end of the lease you have no used vehicle to trade in for your next vehicle. Most likely you haven’t saved up money for a down payment. You haven’t used the lower monthly lease payments to save money for a down payment on your next vehicle. So getting into another leased vehicle may be your only viable option. You end up in a cycle of never really owning a vehicle, trapped into forever making vehicle payments.

The Hidden Economic Risks

Third, you’re hit with big financial penalties if you end up driving the vehicle more than the contract allows. You could also owe money if you have excessive wear and tear on the vehicle’s interior or exterior. You may also be penalized if the vehicle ends up having depreciated more than the leasing company figured it would as of the start of the lease contract.

Fourth, it’s usually harder to get out of a vehicle lease than a vehicle loan. With a loan it’s more likely that you’d build up some equity sooner. So you could sell the vehicle and pay off the loan. In contrast, getting out of a vehicle lease before its term is up is usually expensive. It can cost you thousands of dollars. The amount you would owe would depend on the vehicle’s “realized value.” That’s the relatively low amount the lease company would get from selling the vehicle at an auto auction. That amount isn’t even knowable until you want to get out of the lease so your big exit fee could come as a rude surprise.

As a result of these hidden costs and risks, leasing is usually the most expensive way to have access to a vehicle:

  • you have the car during the period of its greatest depreciation
  • at the end of the lease you have to return it because you’ve not built any ownership in it
  • when you return  it you potentially pay extra to do so
  • then you repeat all this with another lease, continuously making payments
  • so you never to own a vehicle free and clear

Discharging Lease Debts through Chapter 7 Bankruptcy

“Discharge” is the legal write-off of a debt in bankruptcy. (See Section 524 of the U.S. Bankruptcy Code about the “Effect of discharge.”) Under Chapter 7 debts get discharged within about four months of when you and your bankruptcy lawyer file your case.

Vehicle lease obligations almost always get discharged in bankruptcy. There are certain other types of debts that are never discharged; others in which a creditor can challenge the discharge. But these exceptions don’t usually apply to vehicle leases.

Discharge Early Termination or End-of-Lease Charges

Chapter 7 bankruptcy allows you to escape the lease early. Your circumstances may have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve already even fallen behind on those payments. Or you may just not longer need or want the vehicle. You may simply need the money for more crucial expenses.

Or, instead of trying to get out of the lease early, you may just be getting towards the end of your lease. Because of high mileage or lots of wear and tear on the vehicle, you expect to owe money then.

So, Chapter 7 lets you get out of your vehicle lease at any point without paying anything more on it.

 

Business Leases Recharacterized

February 27th, 2017 at 8:00 am

A business leases may not be a true lease but rather recharacterized as a secured purchase, giving you significant power over the creditor.  


Our blog post a week ago was titled “Leases that Are Actually Secured Purchases.” Sometimes a transaction labeled a lease is legally not truly a lease but is really a disguised purchase. Leases give the lessor/creditor a lot of leverage over you, the lessee/debtor. If you can persuade your bankruptcy court to recharacterize the “lease” as a secured purchase, you are usually in a much better position.

Last week’s post reviewed this from a consumer perspective. Today’s focus is on business leases, using an equipment lease as an example.

Disadvantages of True Leases in Bankruptcy

As a lessee, such as on a business equipment lease, very soon after filing bankruptcy you must choose between “assuming” or “rejecting” the lease. You “reject” the lease if you are not keeping the leased equipment. If you want to keep the equipment, you “assume” the lease.

That comes with the following disadvantages.

  • If the lease has below-market payments, the bankruptcy trustee may “assume” the lease ahead of you. The trustee does this to sell the lease rights to another party and then pay the proceeds to your creditors. So you could lose equipment you need to operate your business.
  • If you were behind on your lease payments when filing the bankruptcy case, you must cure any missed payments quickly.  
  • If you fell behind after filing bankruptcy while deciding whether to assume the lease, you have to catch up on those as well.
  • You have to make the full regular lease payments going forward, with no break in price.
  • At the end of the lease you return the leased equipment. That’s true unless the agreement allows you to renew the lease or to purchase the equipment. You’re stuck with whatever the lease provides.

After Recharacterization

In contrast, if the equipment lease is recharacterized as a disguised purchase:

  • A trustee may under limited circumstances have some say about keeping the equipment. But generally, if your business needs the equipment and you meet some basic requirement, the trustee can’t take it away from you.
  • If you qualify for “cramdown,” you don’t have to pay any missed payments. As long as you entered into the transaction more than a year ago, and the equipment is now worth less than the remaining balance, you qualify for “cramdown.”
  • With “cramdown,” your monthly payment is reduced, as well as the total you pay for the equipment. The balance owed is divided between secured and unsecured portions. The secured portion matches the amount of the value of the equipment. The unsecured portion is the rest, the portion not covered by the equipment’s value. The monthly payments are reduced because they are based on only the secured portion. They are also often stretched over a longer period, possibly at a lower interest rate.  You pay the unsecured portion only to the extent that you have available funds to do so.
  • At the end of the payment period, you own the equipment free and clear.

 

Our next blog post will get into the special business-oriented factors the bankruptcy courts use to determine whether a lease is a true lease and so deserves the benefits that gives to the lessor.

 

Business Leases of Personal Property

February 24th, 2017 at 8:00 am

With business leases you have the same options in bankruptcy as with consumer leases: to “assume” or “reject” the lease. 


Our last three blog posts have been about leases of personal property in bankruptcy. We’ve been focusing mostly on consumer leases. Now let’s see how it works in the business context.

“Personal Property” in a Business

Let’s first clear up one thing. Personal property does not mean consumer or non-business property. It simply means property that isn’t real property. (Real property is real estate—“any property attached directly to land as well as the land itself.”)

Personal property for a business would include equipment, office furniture and equipment, computers and other electronic hardware, and vehicles used by the business.

Business Leasing

It’s possible to lease just about anything needed in business. Leasing gives you the use of necessary business assets without paying up front for it or tying up your credit. The main downside is that you almost always pay more in the long run. And you commit yourself to keep the business asset for a set period of time.

Bankruptcy Options with Unexpired Leases

In general, regardless which bankruptcy Chapter you or your business files under, you have two basic options with leases.  You can retain the use of the property by “assuming” the lease. If so, you are required to “assume” ALL of the obligations under the lease agreement. Or you can “reject” the lease. Then you return the leased asset. And, if you are in a bankruptcy Chapter that provides for this, any remaining liability is “discharged”—legally written off.

There’s a lot to this, depending on your type of business entity, the terms of the lease, and your continued need for the leased property, among many considerations.

Individual vs. Business Liability

Who is the lessee on the lease agreement? Is it in the business’ name or in your name as an individual? Is it in the business’ name but with you as a co-signor or guarantor?

If you have a small business, usually you will be on the hook for all liabilities on the lease. You may well have directly signed the lease, or signed a guaranty. Or if you own the business as a sole proprietorship, you are individually liable for all obligations of the business.

Sole Proprietorship vs. Corporation

A sole proprietorship is not a separate legal entity from you, unlike a corporation or a limited liability company. Corporations and such can own property and owe debts on their own. Sole proprietorships cannot. So if you operate a sole proprietorship, you are liable on the business’ lease agreements. That’s true even if you operate it through a state- or city-registered assumed business name, and only that name is on the lease agreement.

To be practical, most of the time a lessor will require all small business owners to be individually liable. That’s again done either by requiring you to sign the lease agreement or an accompanying personal guaranty. This is usually true regardless whether you have a sole proprietorship or a corporation or whatever. The liability-avoiding purpose of having a corporation or LLC are often defeated this way in practical reality.

So, most of the time you are personally liable on the lease, and often on all of the business’ other obligations.

Filing Individual Bankruptcy

Assuming you are personally liable on your lease, and on all or most of the debts, you will need to file an individual bankruptcy case. If you have a sole proprietorship, it cannot file and does not need its own bankruptcy. (Whether your corporation or other business entity should do file one is beyond this discussion.)

You will likely have the option to “assume” or “reject” your business lease regardless which bankruptcy Chapter you file. Here is a very broad summary of how this works in Chapter 7, 11, and 13.

Chapter 7, 11, and 13

Under a Chapter 7 liquidation, if you assume the lease and are behind on the lease payments or are in breach of any other terms, you must get current and/or cure the breach within a month or two.  If you reject the lease, you surrender the property and your liability is usually discharged within about 4 months.

Under a Chapter 11 reorganization, you usually have more time to cure any breach. But Chapter 11 is a relatively expensive and time-consuming procedure that is seldom appropriate for a very small business.

Under a Chapter 13 adjustment of debts, you also have more time to cure a breach of the lease. It is a much less expensive procedure—it can easily cost one-tenth as much than Chapter 11. Only individuals can file under Chapter 13; corporations and other business entities cannot. But usually, even on a business lease, there is only personal liability. Or the personal liability is the only one that matters. If you assume the lease, you must still accept all the lease obligations. And if you reject the lease, any obligations arising from it are included with the rest of your “general unsecured” debts. You may have to pay some portion of that. But usually you are only paying a set, limited amount to all those “general unsecured” debts, so adding in the lease obligations does not increase the amount you would pay overall.

 

The Difference between a True Lease and a Secured Purchase

February 22nd, 2017 at 8:00 am

To determine whether a “lease” is actually a disguised secured purchase, the bankruptcy court looks at the deal’s economic substance.  

 

In our last blog post we showed how in bankruptcy a lease isn’t always a lease. A transaction labeled as a lease of personal property may actually be a secured purchase for bankruptcy purposes. We showed that when a so-called “lease” is not a true lease, through “cramdown” you can often keep the property being “leased” for much less than you’d pay otherwise.

Today our blog post is about the factors that the bankruptcy courts look at in distinguishing a true lease from a disguised secured purchase.

Federal Bankruptcy Law or State Laws Govern?

Generally, under the U.S. Constitution federal law governs what happens in bankruptcy. (See Article I, Section 8.) However, the U.S. Bankruptcy Code does not define the term “lease.” It doesn’t say how to distinguish between a lease and secured purchase.

The Bankruptcy Code does definitely treats “unexpired leases” very differently than secured purchases. It dedicates a major detailed and lengthy section to this distinction. (See Section 365.)

Without a definition of “lease” in the Bankruptcy Code, bankruptcy courts have to look to state laws. This means that whether something called a lease is treated that way in bankruptcy may differ from state to state.

Substance Governs over Form

In looking at state laws, bankruptcy courts have uniformly said it’s not very important what the transaction is called. Instead what counts is its substance—the transaction’s actual terms.

The following easily manipulable circumstances are not usually very important:

  • whether the written agreement is called a lease or a purchase
  • who holds the title to the leased/purchased goods

All of the states, with the exception of Louisiana, have adopted the Uniform Commercial Code’s provisions on sales and leases. The UCC says that “[w]hether a transaction creates a lease or a [secured purchase] is determined by the facts of each case.” In other words, look to the economic substance of the transaction.

The Main Factors

Bankruptcy courts look at all relevant factors when determining the economic substance of a lease/loan agreement. No single factor determines it.

1) One very important factor is how the monthly payments are calculated. Lease and purchase payments are calculated differently. True lease payments are based on “current consumption” prices. That’s the market rate price for the continued use of the thing being leased. Otherwise, if the payments are larger, then may be construed as interest and principal payments for purchasing the property.

2) Is there an option to buy the property at any point for a relatively small amount? If so, that “lease” sounds more like a secured purchase.

3) Are you required to buy the property when a certain event occurs? If so, again that indicates a secured purchase.

4) Do you own the property when you finish making the required “lease” payments? This is common with furniture leases and such, which are indeed sometimes advertised as “rent-to-own.” If you are supposedly renting to own, there’s a good chance that the “lease” is not a true lease but rather a disguised secured purchase.

If your so-called lease is not a true lease, you would not be stuck with either “assuming” the lease and all of its terms or else “rejecting” it and surrendering the “leased” property. Instead under Chapter 13 you could likely do a “cramdown” and keep the property, often for much less money.

 

Leases that Are Actually Secured Purchases

February 20th, 2017 at 8:00 am

A “lease” of furniture or other consumer goods may actually be a disguised purchase. If so, through “cramdown” you can pay much less on it. 


Our last blog post was about your bankruptcy options on leases of personal property—such as furniture or electronics. Your basic options are either to “accept” the lease or else “reject” it. When “accepting” the lease you keep possession of the property and must accept ALL of the lease’s terms and obligations. When “rejecting” the lease, you surrender the property and ALL of the remaining lease debt is discharged—legally written off. It’s all or nothing.

But what if that lease is really just a disguised purchase over time, with the “leased” property as collateral? If so, that may give you some major advantages. There can be a big difference in the bankruptcy consequences leasing something instead of buying it on time.

An Example—Assuming a Furniture Lease

Let’s say that a year ago, after a period of unemployment, you got a new job that required you to move to a new area. Your family rented an unfurnished home and then rented a bunch of furniture for it. You got two sets of bedroom furniture, as well as for the family room and dining room.

Your credit record was terrible so you used a “rent-to-own” contract, having been told you “didn’t need credit.” You pay $350 per month for furniture which you heard would have cost about $7,000 to buy new. Under the terms of the contract, after paying 36 monthly payments you would own the furniture. But until then you were renting it.

Your income from the new job has not turned out to be as high as you’d hoped. Plus huge debts from when you were not employed are putting unbearable financial pressure on you. So you talk with a bankruptcy lawyer about your options.

You learn that if you file bankruptcy and the rent-to-buy contract is treated as a lease, your options are limited. You can “assume” the lease by continuing to pay the $350 monthly payments and keep the furniture. Or you can “reject” the lease, give back the furniture, and any resulting debt would be discharged in bankruptcy. That would leave your family with an empty house so that’s not really an option.

But by this time the furniture has depreciated to being worth no more than about $3,000. Furniture depreciates very quickly. Paying $350 for the remaining 24 months would mean you’d be paying $8,400 more on furniture now worth barely a third of that. So you are very hesitant to “assume” such a bad deal.

If the “Rent-to-Own” Is Treated as a Secured Purchase

In contrast, if the contract is treated as a purchase over time, you would likely pay much less for the furniture. If you filed a Chapter 13 “adjustment of debts” you could do a “cramdown” of that obligation. (You qualify to do this on personal property other than a motor vehicle, as long as at least one year has passed since entering into the transaction. See Section 1325(a)(final paragraph after subsection (9).)

Under “cramdown,” the secured creditor’s debt is only treated as secured to the extent of the value of the collateral. In our situation, the $8,400 remaining debt is secured only to the extent of $3,000. That is the portion that you would have to pay for sure to keep the furniture. The remaining $5,400 would be treated as unsecured.

You would pay the $3,000 secured portion through your Chapter 13 payment plan. You could reduce the $350 monthly payments usually to any amount that would pay the $3,000 plus interest within the 3-to-5-year length of the case. So the monthly payment could be $100 per month, or maybe even less.

The remaining $5,400 unsecured portion would almost never be paid in full. You may not have to pay any of it. It is lumped in with the rest of your “general unsecured” debts. In most Chapter 13 cases, you wouldn’t pay any more into your plan because of that $5,400 unsecured debt. That’s because in these case you pay a certain amount towards the pool of all of your “general unsecured” debts. That amount is based on your “disposable income” during the period of your plan, minus other secured and “priority” debts that you must pay first.

So, for practical purposes “cramdown” usually significantly reduces your monthly payments and the total amount you pay.

Distinguishing Personal Property Leases from Secured Purchases

Because of the potentially huge difference in the treatment of leases and secured purchases, disputes arise about whether a transaction is a true lease or a disguised secured purchase. Our next blog post will be about the factors that the bankruptcy court looks at to decide.

 

Personal Property Leases in Bankruptcy

February 17th, 2017 at 8:00 am

Leases of consumer goods—furniture, appliances, electronics—are like vehicle leases: you can “accept” or “reject” them. 

 

Our last 9 blog posts have been about vehicle leases and residential leases. How are leases of other kinds handled when you file a Chapter 7 or Chapter 13 case?

For example, if you didn’t buy but rather leased your living room furniture, what happens to the furniture in bankruptcy?

Real Estate vs. Personal Property

There are different rules in bankruptcy for real estate and residential rentals vs. those involving personal property. Personal property includes all property that isn’t real estate. It includes vehicles, furniture, computers, and pretty much anything you can touch (and some property you can’t touch!) as long as it isn’t real estate.

The rules about vehicle leases pretty much apply to other consumer personal property leases. We covered vehicle leases in four blog posts recently, published on the website from January 27 through February 3, 2017. Check them out if you want to.

Today we summarize those rules as applied to personal property leases other than vehicle leases, such as the rental of living room furniture mentioned above.

(Note: we use the terms “lease” and “rental” interchangeably—they pretty much mean the same thing for our purposes here.)

“Assumption” of Lease in Chapter 7

If you have an unexpired personal property lease and you want to keep the leased furniture or other personal property, when you file a Chapter 7 “straight bankruptcy” you almost always have the option of “assuming” the lease. This means that you agree to keep and remain bound by all of the terms of the lease.

By “assuming” the lease, of course you agree to continue being legally obligated to make the monthly lease payments. Less obviously, you also agree to pay whatever fees, expenses, or penalties that the lease requires.

Some of these other financial obligations may only apply if you fail to make the monthly lease payments. These include late fees and repossession charges. But some may apply even if you make the payments perfectly. For example, you may have to maintain property insurance or pay a cleaning fee at the end of the lease.

So, before “assuming” a lease in a Chapter 7 case, review the contract terms carefully with your bankruptcy lawyer to make sure you thoroughly understand you are again signing up for.

Lease “Assumption” in Chapter 13

This works similarly in an “adjustment of debts” Chapter 13 case, with some extra advantages for you. 

If you are behind on your lease payments, Chapter 13 gives you more time and flexibility to catch up. Under Chapter 7 you essentially have a month or two to get current. If you don’t, you can’t assume the lease and keep the furniture or whatever else you’re leasing.

Having more time to catch up is especially helpful if you have other obligations that wouldn’t just go away in a Chapter 7 case. Debts like recent taxes or back child or spousal support, or if you’re behind on a mortgage or vehicle loan.

Chapter 13 can also be more flexible down the line. If you no longer want to keep the leased furniture or other leased item 6 months or even a year or two later because of changed circumstances, you can convert your case into a Chapter 7 one and likely discharge (legally write off) any remaining financial obligations on the lease.

“Rejection” of Lease in Chapter 7

In a Chapter 7 case you can decide that the leased furniture or other item is not worth keeping. Then you “reject” the lease and give back whatever you leased. Just about always your Chapter 7 case forever discharges whatever contractual debt remains from the lease.

You can choose to reject the lease because you can’t afford the payments any more. Or reject because you simply don’t want the furniture or whatever you’re leasing any more. You don’t need a reason. It’s simply your opportunity to get out of the lease if you want to without any financial cost.

Lease “Rejection” in Chapter 13

You have the same opportunity in Chapter 13 as well, with two twists worth mentioning.

First, as mentioned above, you may have more flexibility to “assume” the lease at first and then “reject” later. At that point you may be able to file an “amended Chapter 13 plan” and reject the lease then. However, that may leave you with some financially obligations on the lease. On the other hand your situation may have changed enough to justify converting your Chapter 13 case into a Chapter 7 one. Then you could very likely discharge any remaining liability on the lease.

Second, whatever liability remaining from the lease after your “rejection” would be treated as a “general unsecured” debt. Most Chapter 13 cases pay a certain percentage of their “general unsecured” debts. But because most plans pay only a set amount of money towards these debts over the life of the case, the remaining debt from the lease usually doesn’t increase the amount you have to pay. It just reduces how much your other “general unsecured” debts get paid while not changing how much you pay.

 

Leaving My Rental after Filing a Chapter 13 Case

February 15th, 2017 at 8:00 am

Chapter 13 has advantages and potential disadvantages compared to Chapter 7—it’s more flexible but there’s a chance you’ll pay more. 


The last blog post was about the advantages of leaving behind your residential lease after filing a Chapter 7 case. Most of those advantages apply to a Chapter 13, too. And then some.

Reminder about Chapter 7 vs. Chapter 13

The rest of this post will make much more sense after understanding the basic differences between Chapters 7 and 13.

Chapter 7 “straight bankruptcy” is usually a 3-4-month procedure that quickly discharges (legally writes off) most debts. It doesn’t help much or at all with debts that are not discharged. Its protection against creditors lasts only a short time.

Chapter 13 “adjustment of debts” is usually a 3-5-year procedure that deals with your debts more flexibly. It can be especially helpful with debts that Chapter 7 does not discharge or does not handle well otherwise.  

The Chapter 7 Advantages that Also Apply to Chapter 13

  • Buys You Immediate Time

Filing a Chapter 13 immediately stops a filed eviction proceeding, just like a Chapter 7 would. (This assumes that the landlord has not yet received a judgment giving it legal possession of your residence.) The “automatic stay” protecting you from your landlord’s actions against you applies to both types of cases. See Section 362(a) of the U.S. Bankruptcy Code.

  • Buys You More Time to Move

By preventing, stopping, or slowing down an eviction proceeding, filing a Chapter 13 case usually gives you more time to find a new place to live.

It prevents an eviction proceeding because the landlord can’t file one without getting bankruptcy court permission. Because you formally state your intention to “reject” the lease and leave, the landlord usually focuses its attention on making arrangements with your bankruptcy lawyer for your orderly move. That may include permission to stay for a designated number of months while you pay ongoing rent. It might even include reduced rent in return for your commitment to move on a specified date.

If an eviction proceeding has already been filed (but no judgment entered for the landlord), the same principles still apply. Your landlord may at this point be more anxious to have you move, so you may have less flexibility. But you now have a lawyer in your corner and the protection of the “automatic stay.” Plus you have less time pressure because the “automatic stay” lasts for years instead of expiring in 3-4 months. Even after an eviction is filed and “stayed” by your Chapter 13 case, your lawyer may be able to arrange for you to stay on for quite a few months.

  • A Calmer Way to Leave

With the immediate prevention or stopping of an eviction, that buys you some valuable peace of mind. Having a lawyer in your corner and the ongoing “automatic stay” protection give you more of the same. Finally, you get the certainty of an agreed move-out plan, while knowing you can’t be sued for any remaining debt.

  • Gets You Out of an Expensive Lease

Just like Chapter 7, going through Chapter 13 case enables you to leave an unfavorable lease. And once you complete the case, you don’t owe anything to your former landlord.

But Chapter 13 is somewhat more risky here. With both Chapter 7 and 13 you need to successfully complete the case to discharge any residual lease debt. But while a very high portion of Chapter 7s are completed, Chapter 13s have a lower success rate. That’s because they last so much longer and require you to complete a payment plan.

  • Avoid Eviction Proceeding

Just like with Chapter 7, Chapter 13 usually prevents an about-to-be-filed eviction proceeding from happening. That’s good for your renter’s credit record.

The Extra Advantage of Flexibility

Filing under Chapter 13 gives you greater flexibility in a number of distinct ways.

  • Budget Flexibility

Your Chapter 13 plan payment is based on what your budget says you can afford. That budget can usually provide money for after-filing monthly rent for your lender. The rent comes ahead of paying otherwise urgent debts like back child support, income taxes, and/or vehicle loan arrearage. This can be a major advantage over Chapter 7 which doesn’t empower you to prioritize like this.  

  • Moving-Away Flexibility

See above about the likelihood that you can stay longer because of the much longer “automatic stay” protection.

  • Staying-on-the-Lease Flexibility

Under certain circumstances you’d want to “assume” your lease, knowing you can “reject” it later. If you expect to stay at your rental for now, but would benefit from knowing that you can change your mind later, under Chapter 13 you could likely do this through a couple of procedures. If your situation changes so that you need to leave your lease, your lawyer prepares a “modified” or “amended” plan. In that new plan you “reject” your lease and make arrangements for your move. This could potentially be even a couple years after initially filing your Chapter 13 case.

  • Future-Chapter-7 Flexibility

The above scenario assumes that you’d benefit (presumably because of other debts) from staying in the Chapter 13 case. The other procedure for changing your mind and “rejecting” the lease is to “convert” to a Chapter 7 case. At the point in time that your circumstances change, you turn your Chapter 13 case into a Chapter 7 one. This option is better if you no longer need the benefits of Chapter 13 for other ongoing debts. It’s also helpful if you have new debts since filing the Chapter 13 case—including new obligations on the lease.

The Potential Financial Disadvantage

In a Chapter 7 case any financial obligations from the residential lease are almost always discharged in full. But in a Chapter 13 case those obligations are lumped in with other “general unsecured” debts. Most, but not all, Chapter 13 plans earmark some money towards that pool of “general unsecured” debts. However, even those plans that do pay some percentage of the “general unsecured” debts often do NOT result in you paying any more during the case overall.

Please see our blog post of February 3, 2017 regarding “rejected” vehicle leases for our discussion how this works. A hint: it’s because in most Chapter 13 cases there’s only so much money for ALL “general unsecured” debts. So, any of your money paid to your landlord on the lease debt just reduces how much other creditors receive. And you don’t end up paying any larger amount.

 

Leaving My Rental after Filing Chapter 7 Bankruptcy

February 13th, 2017 at 8:00 am

Chapter 7 bankruptcy gives you serious advantages for getting out of a residential lease—advantages in money, time, and peace of mind. 


Getting Out During Bankruptcy

Your financial problems may be unrelated to your rental home or apartment. You may be reasonably happy with where you are and be current on your obligations there.

On the other hand your rental place may be a big part of your problems. It may be too expensive, and/or leave you stuck with a long lease term you wish you could break. You may have gotten a new job and need to move closer to it. You may be behind on your rent and wish you could just move and not have to pay the arrearage. Your landlord may have already started an eviction proceeding.

Whether you were or weren’t considering it, bankruptcy gives you a great opportunity to get out of your lease. Think about whether it might be advantageous once you’re filing bankruptcy regardless of your prior intentions about it.

Today’s blog post covers how Chapter 7 “straight bankruptcy” helps you leave your rental. The next post gets into how Chapter 13 “adjustment of debts” can do so.

Advantage—Buys You Immediate Time

Your landlord may have just started an eviction proceeding. These proceedings move very quickly so it’s crucial to take action immediately.

Under the U.S. Bankruptcy Code, an eviction is NOT stopped if the landlord “has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.” (See Section 362(b)(22).

So as long as your landlord hasn’t yet gotten a judgment for possession, your bankruptcy filing will stop that proceeding. It’ll stop the landlord from removing you, at least for a few weeks and possibly for a couple months. It gives you the time to catch your breath financially and emotionally.

Advantage—Buys You More Time to Move

Even if an eviction hasn’t been filed, you may know that you need or want to end your lease. Doing so during a Chapter 7 case usually gives you more time to move.

The landlord can’t start an eviction case without first getting special permission from the bankruptcy court. You are protected from your landlord just like any other creditor. See Section 362(a) of the Bankruptcy Code. Preventing an eviction proceeding buys you time because otherwise you would have gotten evicted within a short couple of weeks.

The landlord likely won’t bother to try to get permission to start an eviction proceeds during your Chapter 7 case. That’s because it’s usually less expensive for your landlord instead to contact your bankruptcy lawyer to make reasonable move-out arrangements. Usually that can include allowing you to stay longer, possibly for a reduced rent. Landlords sometime even pay their tenants some of their moving costs in exchange for a definite move-out date. They may do that to avoid their costs and uncertainties involved in an eviction.

Advantage—A Calmer Way to Leave

Under most circumstances it’s calmer to leave a rental that you’re behind on or terminating early when you do so under bankruptcy.

You have your bankruptcy lawyer representing you and available to help. You have the protection of the bankruptcy court if necessary. Your landlord can’t pursue you for unpaid rent or other financial obligation as you’re trying to leave. You are protected from other immediate creditor pressures as well.

 So it’s usually easier on you to leave your lease behind when you have this kind of help than when you’re just doing it on your own.  

Advantage—Gets You Out of an Expensive Lease

Just as important as time and peace of mind, bankruptcy saves you money.

If you are not current on your monthly apartment or home rental payments when you file your Chapter 7 bankruptcy case, those payment obligations will be discharged a few months after filing. If you are breaking a lease before the end of its term, you could owe substantial penalties for doing so. Those could potentially include many months of future rental payments. Those are all discharged as well.

Advantage—Avoid Eviction Proceeding

You have a rental credit record separate from your general credit record. For obvious reasons you want to keep your rental credit record as strong as you can. Depending on your circumstances, bankruptcy can help with that.

One way it can do that is to prevent an eviction proceeding. Understandably that’s one of the worse things possible on a rental credit record. With the right timing, your Chapter 7 filing could prevent an election proceeding from being filed.

More generally, your Chapter 7 filing helps you end your lease in a more structured and predictable way. That’s often significantly better for your landlord, which can be reflected in how it discloses the event on your rental credit report.  

 

What If I’m Too Far Behind on My Rent?

February 10th, 2017 at 8:00 am

In a Chapter 13 “adjustment of debts” you have much more time to get current on your residential lease agreement than under Chapter 7. 


The Challenge under Chapter 7

Our last blog post showed how Chapter 7 “straight bankruptcy” can help you keep your home or apartment lease. Mostly it clears away other debts so that you can better afford your rent payments. Hopefully, if you’re already behind on those payments, it’s easier to catch up when you no longer have other debts.

But the disadvantage with Chapter 7 is that, if you are behind, you have very little time to catch up. Most of the time you need to get current within a month or two after filing the case. That’s because Chapter 7 cases are completed very quickly, giving you only brief protection against your landlord.

This short timetable presents a major challenge because usually you’re cash poor when you file bankruptcy. Often you’re pushed into bankruptcy because of a cash-depleting event like is a paycheck or bank account garnishment. You may be behind not only on rent but also on other obligations like utilities or rental insurance. That could additionally put you in breach of your lease agreement. Plus you may also be behind on other very important obligations like your vehicle loan or child support.

The short break you get from collections under Chapter 7 is often just not long enough to catch up on rent. That’s particularly true if some of your debts are of the type that Chapter 7 doesn’t discharge (legally write off).

The Chapter 13 Solution

The broad overall advantage of Chapter 13 is that it buys time. And that’s true with a residential lease agreement on which you owe late rent payments. Instead of having only a couple months to catch up, under Chapter 13 you have many months, or even possibly a couple years, to do so.

That’s potentially reason enough to file a Chapter 13 case, even though it takes several years instead of several months. The longer length gives you the advantage of more time to catch up on the rent.

An Example

The difference between Chapter 7 and 13 here is best shown by an example.

Imagine that you are two months behind on a home rental of $1,500 per month, or $3,000 behind. You also owe the IRS income taxes for 2014 in the amount of $10,000. Your paycheck was just garnished by the IRS, leaving you worse than broke. You’re also 5 months behind on your $500 monthly child support. Your ex-spouse just turned you over to the support enforcement agency to force you to pay up. And your landlord just informed you it’s about to file an eviction proceeding.

In spite of all this you desperately want to stay in your rental. It’s in a great location for your work and your kids’ schools. Besides, you’d have no way to come up with the first and last month’s rent for a new place. Your bad overall credit record and now your bad rental record would make qualifying for a new place very doubtful. So you understandably want to keep yourself and your family where you are now if at all possible.

If You Didn’t File Bankruptcy

Without filing bankruptcy, assuming you have no way of coming up with the $3,000 back rent, you would likely be evicted within a few weeks. In the meantime, the support enforcement agency can take very aggressive collection actions against you. That could include the suspension of your driver’s license, as well as any occupational or professional license. You could maybe work out a monthly payment plan with the IRS. But given the other extreme financial pressures on you it’s highly doubtful that you could reliably stick to any commitment.

You’d be evicted and continue to overwhelmed by debt. This is not a pretty picture.

Under Chapter 7…  

A “straight bankruptcy” would not likely help enough to save your home.

You’d get a 3-4 month break from the IRS’s collections. But you would not discharge (legally write off) that $10,000 tax debt because it’s not old enough to qualify. So very quickly you’d be back in their crosshairs.

The Chapter 7 filing wouldn’t give you ANY break from the support enforcement agency’s garnishments and potential license suspensions.

Somehow in the midst of all that you’d need to have quick access to the $3,000 in back rent. Maybe you have so much in other debts that not paying them would free up tons of money every month. But most people filing bankruptcy have already stopped paying a lot of their debts, so that likely wouldn’t help enough.

Chapter 7 simply doesn’t help most people in these kinds of situations enough.

Under Chapter 13…

Filing instead an “adjustment of debts” case would much more likely let you to stay in the home.

Your Chapter 13 filing would immediately stop all collections by the IRS, the support enforcement agency, and the landlord. And that stopping would likely last for the full 3-to-5-year length of the case. Your budget would determine how much you would realistically pay to ALL of your creditors each month. That monthly “Chapter 13 plan payment” would be divided among your creditors. It would pay the IRS, support enforcement, and the back rent before and instead of paying any other debts.

As a result, you would eventually completely catch up on the rent, likely within a year or two. (And you’d pay each new month’s rent on time as well, as provided in your budget). In the same way you’d also eventually bring your child support current, and pay off the income tax debt. To the extent that you’d have any “disposable income” beyond that, it would go to your remaining debts.

So, at the end of your Chapter 13 case you’d be current on your rental and child support, and you’d have paid off the income taxes. To whatever extent you didn’t have enough “disposable income” for the other debts, they would be discharged.

You would have succeeded in staying in your home, and be debt-free.

 

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