If you are leasing a car, truck, van, or another motor vehicle when you file for Chapter 7 bankruptcy, you have two options for the car lease: You can assume the lease (continue with it) or reject the lease (terminate it).
The 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.
When you file a Chapter 7 bankruptcy, you are required to file a form called the Statement of Intention for Individuals Filing Under Chapter 7 within 30 days of filing the petition. The Statement of Intention form tells the creditor what you wish to do with an unexpired lease (like a car lease), as well as other debts that are secured by property after your bankruptcy. (A secured debt is guaranteed by collateral you must return if you don’t pay as agreed.)
If you don't file the Statement of Intention within the time limit, the automatic stay—the order that prevents your creditors from taking collection actions such as repossessing your car—will be lifted. If this happens, the lender has the right to pick up the vehicle.
Other Types of Debts to List on the Statement of Intention
You’ll list all of your secured debts—such as a car loan or mortgage—and personal property leases on the Statement of Intention. Personal property is essentially everything other than real estate. A lease is a contract you enter into in which you pay for the right to use property—such as a car, restaurant equipment, or cement mixer—for an amount of time. A lease is useful because it’s cheaper than buying the property outright.
Here’s a list of typical leases you might need to include on the form:
- vehicle leases
- furniture and equipment leases (including rent-to-own contracts), and
- telephone, internet service, and utility equipment contracts.
When filling out the forms, you’ll included the secured property or leased personal property on Schedule A/B. If you still owe money on the contract—whether expired or not—you’ll list the debt on either Schedule D or E/F.
(For additional information about bankruptcy forms, see Completing the Bankruptcy Forms.)
Assuming the lease on the Statement of Intention lets the creditor know that you intend to keep the leased vehicle and will continue to make timely payments until the lease expires. By doing so, you agree to the terms of the initial lease. When the lease expires, the dealer can 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, and can sue you for the amount you still owe on the lease contract.
If you indicate on the Statement of Intention that you wish to reject the lease, you are letting the creditor know that you don’t intend to continue paying on it. Your creditor might 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.
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 a Statement of Intention 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 doesn’t 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 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.)
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 might interpret your actions as evidence that you wish to assume the lease and argue that you should be held responsible for it.
If you are considering Chapter 7 bankruptcy and you lease a vehicle, it is important to decide whether you can afford the payments or whether you should return the car to the dealer—then make sure your actions match what you indicate on the Statement of Intention.