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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: 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.

 

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.

 

Keeping Your Leased Vehicle through Chapter 13

May 6th, 2016 at 7:00 am

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

 

Lease “Assumption” under Chapter 7

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

Problems with “Assumption”

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

The Chapter 13 “Adjustment of Debts” Solution

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

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

Lease “Assumption” under Chapter 13

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

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

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

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

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

The Lease Terms Remain in Effect

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

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

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

 

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