If you are leasing a car, truck, van, or other motor vehicle when you file for Chapter 7 bankruptcy, you have two options for the car lease: You can assume the lease (continue with the lease) or reject the lease (terminate it).
Which option you choose determines whether you can keep using the car, and whether you will be liable for lease payments, excess mileage, or other penalties after the bankruptcy.
How to Assume or Reject a Car Lease
When you file a Chapter 7 bankruptcy, you are required to file a form called the Chapter 7 Individual Debtor’s Statement of Intention within 30 days of filing your petition. The Statement of Intention form, or SOI for short, lets your secured creditors know what you wish to do with unexpired leases (like a car lease) or debts that are secured by property after your bankruptcy.
If you don't file the SOI within the time limit, the automatic stay, which prevents your creditors from taking collection actions such as repossessing your car, will be lifted. If this happens, the dealer has the right to pick up the vehicle.
Assuming a Car Lease in Bankruptcy
If you indicate that you wish to assume the lease on the SOI, you are letting the creditor know that you intend to keep the leased vehicle and will continue to make timely payments until the lease expires.
If you assume the lease, you agree to the terms of the initial lease. When the lease expires, the dealer may charge you fees for excess mileage or damage to the vehicle, as if you hadn’t filed bankruptcy at all. Similarly, if you fail to make timely payments on the lease, the creditor will have the right to repossess the vehicle, just like before you filed for bankruptcy. Additionally, if you assume the lease and later default on the payments, the creditor can sue you for the amount you still owe on the lease contract.
Rejecting a Car Lease in Bankruptcy
If you indicate on the SOI that you wish to reject the lease, you are letting the creditor know that you don’t intend to continue paying on the lease. Your creditor may file a motion asking the court to lift the automatic stay or wait for the automatic stay to expire and then repossess the car. If you reject the lease, you will not be held responsible for any further installment payments or fees such as those for mileage or damage.
When rejecting a car lease might be a good idea. If you are having trouble keeping up with your lease payments or have high mileage or damage that will result in fees at the end of the lease, rejecting the lease might be a good option for you since you can turn the car in without further payments or liability.
Different Creditor Requirements in Different Jurisdictions
Some creditors treat lease assumptions differently, so it is a good idea to consult with a local bankruptcy attorney who can explain all of the options under your circumstances.
For example, some creditors might be satisfied with an SOI that indicates that you wish to assume a lease, while others might ask you to sign another form they’ve created, stating that you wish to assume the lease. This form does not get filed with the bankruptcy court, but the creditor retains it as additional evidence of your intent to assume the lease.
Other creditors might ask you to sign a reaffirmation agreement, which is an agreement between you and your creditor stating that you will be liable for the agreement under its original terms. Reaffirmation agreements are typically reserved for vehicle purchase loans, but some creditors utilize them for leases and find that some judges will approve them. (To learn more about reaffirmation agreements, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.)
Make Sure Your Actions Match Your Intentions
Some courts might treat your actions as evidence of your intentions, regardless of what you indicate on the Statement of Intention form. This means that if you continue to make payments on the lease after your bankruptcy, the creditor may interpret your actions as evidence that you wish to assume the lease, and may argue that you should be held responsible for the lease because you communicated your intent to assume it.
If you are considering Chapter 7 bankruptcy and you lease a vehicle, it is important to decide whether you are able to afford the payments and wish to continue with the lease, or whether you wish to return the car to the dealer -- then make sure your actions agree with what you indicate on the Statement of Intention.