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Archive for the ‘surrender of vehicle’ tag

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.

 

The Financial Effect of Surrendering Collateral in Chapter 13

November 25th, 2016 at 8:00 am

If you are concerned that in a Chapter 13 case a debt resulting from surrendered collateral will cost you more, often it won’t.

 

Secured Debts in Chapter 13

In a Chapter 13 “adjustment of debts” case you have the option of keeping or surrendering collateral.

Whether it’s your home, your vehicle, or any other collateral, Chapter 13 gives you powerful tools for keeping that collateral.

But in spite of that, sometimes the best option is still to surrender that collateral. You may have overextended yourself buying a vehicle whose payments and insurance you can no longer afford. Or you’ve learned that it’s a lemon and not worth the constant repair costs. Or you bought a home that you’re so far behind on that it’s not worth the cost and effort to catch up, even if Chapter 13 gives you a lot of time to do so.

Secured Debts Turned into Unsecured Ones

So Chapter 13 gives you the option of just surrendering the vehicle or home or other collateral to the creditor. That has the effect of turning that debt from a secured debt into an unsecured one. The creditor usually accepts possession of the vehicle or home, sells it, and, if the sale proceeds do not satisfy the debt, you may owe the remaining balance.

Outside of bankruptcy, if you are liable on that “deficiency balance,” you’d have to pay it. You’d be sued for payment if you didn’t pay. In a Chapter 7 “straight bankruptcy,” that remaining unsecured debt would usually simply be discharged—legally written off. But what happens to that remaining debt under Chapter 13?

Dealing with the Remaining Unsecured Debt under Chapter 13

A Chapter 13 case usually involves a 3-to-5-year payment plan. At the end of the payment period, there’s a discharge of all or virtually all of your remaining debts.

In many Chapter 13 plans, much of the money paid out to creditors goes to special debts. Those special debts are either secured and priority debts. Secured debts are payments to creditors with liens on collateral you want to keep, as mentioned above. Priority debts are ones—usually unpaid income taxes and/or child or spousal support—that would not be discharged in bankruptcy and so need to be paid. In many Chapter 13 cases, most of the debtors’ disposable income goes to pay these secured and priority debts.

This often leaves relatively little money for the rest of the debts—the unsecured, non-priority ones. Sometimes, it leaves no money at all for these other debts—0% of the amounts owed.

But there are also some Chapter 13 cases—usually ones with relatively little secured and priority debts—in which the plan provides for paying a large percentage of the other debts. There are even cases which require paying 100% of the unsecured debts.

But these are rare. Much more common are plans paying a low percentage of the unsecured debts. Chapter 13 requires payment of all disposable income to creditors during the course of the 3-to-5-year case. Often that simply doesn’t leave much left for the unsecured debts.

Surrendering Collateral Seldom a Financial Disadvantage

Without understanding how Chapter 13 really works, it may seem like a disadvantageous way to surrender collateral. Why pay even just part of the remaining unsecured debt after surrendering collateral when you can just discharge that debt in a Chapter 7 case without paying anything?

There are in fact good reasons not to mind surrendering collateral in a Chapter 13 case:

  • You wouldn’t be in a Chapter 13 case unless it gave you a big advantage for other reasons. For example, you may be willing to surrender a vehicle you really didn’t need if Chapter 13 gave you great way to save your home. There are many, many reasons that Chapter 13 is better than Chapter 7. Paying a small part of the unsecured debt on the surrendered collateral may be well worth the other benefits.  
  • But in probably the majority of cases you would NOT be paying ANY more into your Chapter 13 plan because of a surrendered vehicle, home or other collateral. Why not?
    • If you have a 0% plan as mentioned above, you’re not paying anything to any general unsecured debts. So adding the debt from the surrendered vehicle, home, etc. makes no difference. Paying nothing on a somewhat larger pile of debt is still nothing.
    • Even if your plan IS scheduled to pay a certain percent of your general unsecured debts, it STILL doesn’t usually cost you more. That’s because in most cases you only have a certain amount of money available for the pool of all these debts. Adding another debt to that pool only spreads that same available money out among more debts. When you add the debt from the surrendered collateral, the other debts are just paid less.

Conclusion

Before you shy away from surrendering collateral in a Chapter 13, ask you bankruptcy lawyer if it will cost you any more to do so. In most cases it does not.

 

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