Car Leases in Chapter 13 Bankruptcy

If you have a car lease when you file a Chapter 13 bankruptcy you have two options – rejecting the lease and returning the car or continuing with the lease. Read on to learn the pros and cons of each option.

The Trustee Can Assume or Reject the Lease

In a Chapter 13 case, the trustee has until confirmation of your Chapter 13 plan to assume or reject the car lease. If the trustee assumes the lease, he or she essentially steps into your shoes in the lease contract. This happens very rarely with car leases. If the trustee does not want to assume the lease, then you get to decide what to do. After the court confirms the plan, the decision you made in your plan controls.

Here are your options for dealing with car leases in Chapter 13 bankruptcy. Your obligations for payment differ slightly depending on whether you are current or behind on your lease payments.

You Are Current on Lease Payments

If you are current on your lease payments, you have two options – reject the lease or keep the lease as it exists.

Rejecting the Car Lease in Chapter 13

If you reject the lease and return the vehicle to the creditor, you are off the hook for the remainder of the lease payments. However, the creditor can file an unsecured claim with the bankruptcy court to recover for damages to the car or high mileage penalties. These debts would be added to your other unsecured debts – some of your plan payments will go towards paying your unsecured debts and anything remaining at the end of your plan period will be discharged. (To learn more, see Unsecured Debt in Chapter 13.)

Advantages. You can get out of your lease payments, which is especially advantageous if they are high. In addition, if you've incurred mileage penalties or caused damage to the vehicle, you won't have to pay these amounts back in full.

Disadvantages. You lose the vehicle shortly after your plan is confirmed. This could be a problem if you need a car. You will have to get court approval to purchase or lease another car, which can take time and make getting another car more difficult.

Continuing With the Car Lease in Chapter 13

You can also choose to keep the car lease and with it the lease payments and the vehicle. The Chapter 13 trustee will pay the creditor through your Chapter 13 plan.

Advantages. You keep the car.

Disadvantages. This option has two distinct disadvantages. The lease provisions remain in force, which means you could be subject to creditor claims for damages to the car and mileage penalties.

Also, your Chapter 13 filing does not change the lease term. For example, your Chapter 13 repayment period might last for 60 months, but your lease could end after 24 months, at which time you would have to return the car or ask to buy it if your lease allows this. When you are in the middle of a Chapter 13 bankruptcy, you must get court approval to borrow money, which can make it more difficult to get another car.

Notably, this is different from how Chapter 13 bankruptcy treats car loans. You may extend car loan payments over the entire repayment period (which could be as much as five years), even if your loan was originally scheduled to be paid by an earlier date. (To learn more, see Your Car in Chapter 13 Bankruptcy.)

You Are Behind on Lease Payments

If you are behind on your car lease payments, you have the same two options – reject or continue with the lease. If you continue with the lease, you'll have to make up back payments through your plan.

Rejecting the Lease When You Are Behind in Lease Payments

If you reject the lease and return the vehicle, you do not have to pay future lease payments. Again, the creditor can make a claim to recover back payments, excess mileage fees, or for damage to the car – but these will all become part of your unsecured debt.

Keeping the Lease and Making Up Lease Payment Arrears

If you are behind on your lease payments, you can still keep your car but you'll have to make up the back payments through your plan.

Ongoing lease payments. Your bankruptcy trustee will pay these to the creditor through your plan. The advantages and disadvantages of this option are the same as if you were current on your payments (see above).

Lease payment arrears. You can pay back lease payments through your Chapter 13 plan. However, because the length of the lease does not change in Chapter 13 bankruptcy, the arrears must be paid by the last day of the regular lease, at the latest. In fact, they may be due earlier because bankruptcy law entitles the lease creditor to have the late payments cured promptly. Although the bankruptcy code does not define "promptly," bankruptcy courts have held that back lease payments should be paid over a three- to six-month time frame.