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Archive for the ‘Vehicles’ Category

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 13

November 5th, 2018 at 8:00 am

You can keep your leased vehicle under Chapter 7 if you’re current. If not, or have other reasons to do a Chapter 13 case, that’s works too.


Lease Assumption under Chapter 7

Our last blog post showed how to keep a leased vehicle by “assuming” the lease in a Chapter 7 case. This means you keep making the lease payments. You also continue being legally bound by all the other terms of the lease contract.

Problems under Chapter 7

But what if you’re behind on your lease payments, and can’t catch up right away? Very likely the lessor would not allow you to assume the lease. And even if you could you’d be in default on the lease immediately and subject to repossession. You could easily end up owing a substantial amount of damages, and still be without a vehicle.

The Solution under Chapter 13

Filing a Chapter 13 “adjustment of debts” case solves this problem by giving much you more time to catch up on late payments.

A Chapter 13 case revolves around a formal court-approved payment plan that you and your bankruptcy lawyer put together. Your Chapter 13 plan will have a provision stating that you are assuming the unexpired vehicle lease. See Part 6 of the Bankruptcy Court’s official Chapter 13 Plan form. Besides listing the name of the lessor, a short description of the leased vehicle, and the monthly payment, you state the “Amount of arrearage to be paid” and the terms by which it will be paid through the plan. Usually you can catch up on the arrearage under terms that would fit within your budget.  

There is an opportunity for objection to such terms, particularly by the lessor. But usually the lessor is happy that you are choosing to continue being liable on the lease contract. Unless your payment history is terrible, or you’ve violated the lease agreement in other ways (such as not keeping insurance in effect) you’re mostly not going to get any objection. If there’s no objection, or any objection is resolved, the bankruptcy judge will approve or “confirm” the plan. (This assumes that the plan is otherwise ready for confirmation.)

This gives your proposed way of dealing with the lease, including the missed payments, the force of a court order. As long as you comply with those terms you’ll be able to keep your leased vehicle.

Limited Benefit on Leased Vehicles with Chapter 13

Chapter 13 gives you less possible advantages with a vehicle lease than if you had a vehicle loan. There is no opportunity for a Chapter 13 “cramdown” with a lease. A loan cramdown potentially reduces the loan’s monthly payments and the total amount paid to own the vehicle free and clear. Chapter 13 does not enable you to reduce your monthly lease payment. It does not take a penny off what you have to pay over the life of the lease.

Chapter 13 merely allows you to keep a leased vehicle through its lease term. The only real advantage it gives you over Chapter 7 is giving you more time to catch up on any unpaid lease payments. That may be an important advantage if you are desperate to keep the vehicle and are behind.

But be careful. Be aware that if you assume the lease under Chapter 13 you continue being liable on the other terms of the lease. For example, at the end of the lease you could owe money for high mileage or extra wear and tear. You could even lose the vehicle if you didn’t keep up the monthly lease payments. On top of that you could owe additional penalties for early termination of the lease.

Conclusion

Do you need a Chapter 13 case for any of the many other advantages it can give you? Then you will likely also be able to keep your leased vehicle as you’re dealing with those other issues.

Are you behind on your leased vehicle and absolutely want to keep it? Are you fully aware of the possible disadvantages of staying in your lease (partially outlined above)? If so, then Chapter 13 provides a way to keep your leased vehicle by catching up on the missed payments over time while you are protected from repossession.

 

The Surprising Benefits: Keeping Your Vehicle Lease under Chapter 7

October 29th, 2018 at 7:00 am

If you file a Chapter 7 case and write off your other debts, will you want to keep your vehicle lease? You can if you’re current on it now.

 

Our last three blog posts have been about rejecting a vehicle lease and giving the vehicle back to the lessor. You can do this either through Chapter 7 or 13. The result is the same in the end.  Assuming you successfully finish the bankruptcy case, you’ll forever discharge (legally write off) any debt you’d owe afterwards.

But you can also usually keep a leased vehicle. Depending on your circumstances, you can “assume” the lease in either a Chapter 7 or 13 case. Today’s blog post is about how this works in a Chapter 7 case. Next week we get into keeping a leased vehicle in a Chapter 13 one.

“Assuming” Vehicle Lease

When you file bankruptcy you make a formal choice about whether or not you want to “assume” the lease. Assuming an unexpired lease generally allows you to keep the vehicle while continuing to be legally bound by the lease contract. You give up the option to reject the lease and discharge—forever write off—any financial obligations on that contract. (Section 365(a) of the U.S. Bankruptcy Code.)

The “Statement of Intention”

To formally assume the lease in a Chapter 7 “straight bankruptcy” case you say that’s want you want to do in the court documents your bankruptcy lawyer prepares for you. In the “Statement of Intention for Individuals Filing Under Chapter 7” “List Your Unexpired Personal Property Leases” (on page 2). After stating your lessor’s name and the vehicle being leased, there’s a simple question: “Will the lease be assumed?” Check the “Yes” box.  Your bankruptcy lawyer files this Statement of Intention at the Bankruptcy Court (electronically). He or she also delivers a copy of to the lessor. (See Bankruptcy Rule 1007(b)(2).)

You and your lawyer must file this document within 30 days of filing your bankruptcy petition. Often it’s filed with your initial bankruptcy petition and the rest of your documents at the beginning of your case.

Consequences of Assuming the Lease

Be fully aware of the potential consequences before you assume the lease. Filing a Chapter 7 case gives you the opportunity to cancel your lease contract without owing anything. Assuming the lease gives up that opportunity.

If you assume and then in the future you couldn’t make the monthly lease payments, the lessor would take back the vehicle. Then the lessor could sue you for the amount you still owe on the lease contract.

Even if you make all the required monthly payments, you may still owe money at the end of the lease. You could owe substantial charges for excess mileage or damage to the vehicle. You could potentially owe thousands of dollars, and again be sued if you did not pay.

There are situations when it makes sense to keep a leased vehicle by assuming the lease in bankruptcy. But be sure you think about the benefits of getting out of the lease, and understand the risks.

When Chapter 13 Helps You Keep Your Leased Vehicle

In a Chapter 7 case you should generally be current on the monthly payments in order to assume the lease. If you’re not current, be sure that you can immediately get current. If you can’t, the lessor will very likely not allow you to assume the lease.

If you are behind but definitely want to keep the leased vehicle, Chapter 13 may be your better option. It usually gives you much more time to catch up on the missed payments. That’s the topic of our next blog post.

 

The Surprising Benefits: Ending Your Vehicle Lease under Chapter 13

October 24th, 2018 at 7:00 am

Chapter 7 gets you out of a vehicle lease owing nothing. Chapter 13 is more complicated but can give you pretty much the same good result.

 

Ending a Vehicle Lease in Chapter 7

Our last blog post was about how a Chapter 7 “straight bankruptcy” can get you out of a vehicle lease. You can “reject” a financially bad lease, and then discharge (permanently write off) whatever you’d owe after surrendering the vehicle. Otherwise you could owe a lot of money when you get out of the lease.

So if you decide that you don’t want to keep your leased vehicle, and need bankruptcy relief, Chapter 7 is likely the cleanest solution.

Ending a Vehicle Lease in Chapter 13

But what if you have other reasons to file a Chapter 13 “adjustment of debts” case instead? Chapter 13 can be a great way to save your home, catch up on child or spousal support, deal with income tax debt, and solve many other big financial problems, much better than under Chapter 7.

So it’s good news that you can surrender your leased vehicle through Chapter 13 just like under Chapter 7. However, discharging any resulting debt from the lease contract is not as straightforward as in a Chapter 7 case. Here’s how it works.

Possible Debts from Surrendering a Leased Vehicle

First be aware that you could owe various kinds of debts when you surrender a leased vehicle. Surrendering before lease end could make you liable for contractual penalties and/or all the remaining unpaid lease payments. Surrendering the vehicle at the end of the lease could make you liable for high mileage, excessive wear and tear, and the difference between the vehicle’s originally anticipated value at the end of the lease and the actual “realized value” then. Either way the amount you would owe could be thousands of dollars.  

Rejecting the Lease under Chapter 13

Under Chapter 13 you have the options of either rejecting the lease and returning the car, or continuing the lease. For today we’re assuming you no longer need or want to keep and pay for the vehicle.

The immediate benefits of rejecting the lease are just like under Chapter 7. You immediately stop paying the monthly lease payments, and then return the vehicle to the lessor after filing the case. If you’re behind on payments, you don’t have to pay them.

But under Chapter 13 there’s a complication. Your lessor can file a “proof of claim” reflecting whatever amount you would owe under the lease contract. The lessor does so in order to try to get paid part of any remaining debt. This debt is then added to the pile of all your other “general unsecured” debts.

The Category of “General Unsecured” Debts in Chapter 13

In a Chapter 13 case, your debts are divided into categories, one being your “general unsecured” debts. These are the debts that are 1) not secured by any of your property or possessions, and are also 2) not a “priority” debt (various specially-treated ones).

Often you have to pay all or most of what you owe on your secured and priority debts. But this is seldom true with general unsecured debts. Often you pay little or even nothing on your general unsecured debts in a Chapter 13 case. Whether or how much you pay depends on a lot of factors. The main factors are the amount of your secured and priority debts, and how much you can afford to pay to all of your creditors after expenses.

Often Vehicle Lease Debt Does Not Increase What You Pay

In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.

There are two circumstances where that happens, one less common and other very common.

First, in some parts of the country you are allowed to pay 0% of your “general unsecured” debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.

Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.  

For example, assume that after you pay all your secured and priority debts you have $2,000 left over to pay all your general unsecured debts over the life of your Chapter 13 plan. Your vehicle lessor files a claim saying you owe $3,000 after surrendering the vehicle. You owe $30,000 to all your other general unsecured debts. Adding the $3,000 lease debt to the other $30,000 means you owe a total of $33,000 of general unsecured debts. But you pay only the $2,000 that is available (over the life of the plan) either way. Having the $3,000 lease debt just means that the other general unsecured debts receive that much less.

 

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.

 

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.

 

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