Keeping a leased car in bankruptcy

Lease car TeslaA leased car, unlike a purchase-to-own loan, has its own rules and issues in bankruptcy.

When you have a vehicle and file bankruptcy, the first thing you have decide is whether you want to keep the car or not. Maybe the terms of the lease are not favorable, so getting rid of the car is advantageous. If the terms are favorable and you like the car, you can opt to keep it.

When a Chapter 7 case is filed, there is a form called a Statement of Intention, where you indicate what you intend to do with the car. You either elect to assume or reject the lease. When rejecting, you make arrangement with the dealer to take back the car. If you assume the lease, you must send a written intention within a certain period of time, informing the lender of your intent to assume the lease.

In a Chapter 13, your handling of the lease is done through your plan. A Chapter 13 is reorganization where you agree to pay some of your creditors over a certain period of time. Who gets paid, and how much, is part of your Chapter 13 plan. Similarly, whether you intend to keep a leased car is also built into the plan.

Should you keep a leased car? There are a few considerations. First, is the monthly payment affordable? If you are already maxed out and struggling month to month, perhaps this car payment is too much. If it is a good deal, by all means take advantage of that. Second, how close are you to going over the mileage limit? The overage penalties can be quite severe. And some lenders give very few miles per year (Audi is notoriously stingy). If you are at risk for exceeding the miles under your lease terms, rejecting the lease might provide the best option. Rejecting a lease in bankruptcy turns your lease into a debt that is discharged just like any other dischargeable debt, such as a credit card.

Two points of caution I see with bankruptcy and cars. First, beware that bankruptcy does not give you a free car. Whether a lease or a loan, the lender of the car has a lien against the car. If you opt to surrender the car, you can discharge the liability you face personally, but the lender still has a right to recover the car. You must give the car back to the lender, as the car was the collateral to protect the lender in cases of situations such as someone filing bankruptcy.

Second, if you want to keep the car in a Chapter 7, you must be current at the time of filing your case, and continue to pay after you file. Some clients get confused because since they no longer have to pay credit cards and other debts, they stop paying other things, such as a lease payment. It does not work that way with a car. You want it, you have to pay for it. In a Chapter 13, the car lease will be part of your Chapter 13 monthly payment, so you pay the trustee instead of the lender.

There are other complications concerning keeping a leased vehicle. It is therefore recommended you consult with an attorney first. There are too many pitfalls, and asking an attorney to intervene after a problem has occurred probably means it will cost more, and your options are fewer.