Can You Lease a Car While in Chapter 13 Bankruptcy?

You may be leasing a car when you file for Chapter 13 bankruptcy. Or, you may be thinking about leasing a vehicle after you file for Chapter 13.

In this blog post, we cover how car leases interact with the United States Bankruptcy Code and Chapter 13. Specifically, we address:

• Considerations if you have an existing lease agreement you wish to maintain through bankruptcy; and
  
• Considerations if you are considering leasing a vehicle during your Chapter 13 case.

If you need help with your Chapter 13 bankruptcy, call Stone Rose Law at (480) 739-2448 to speak with one of our bankruptcy attorneys.

Effect of Chapter 13 Bankruptcy on New Vehicle Leases

You can seek to enter into a vehicle lease while your Chapter 13 case is still active. You may need to obtain approval from the bankruptcy in advance, so contact your bankruptcy lawyer to see if this is necessary.

Because bankruptcy can have a negative effect on your credit report and credit score, you may need to work with a subprime lender that is familiar with bankruptcy car loans and leases. Although some lenders will lease a car soon after bankruptcy, they will probably require higher payments.

Also, keep in mind that approval of the new lease is not guaranteed. The bankruptcy trustee may object to the proposed lease if the trustee believes the lease will make your payment plan unfeasible.

How Does Chapter 13 Bankruptcy Affect Existing Car Leases?

Under bankruptcy law, a leased car is not considered a secured debt but rather as a contractual obligation. 

If you file for bankruptcy while leasing a car, you will need to decide whether to assume the existing lease or return the car. You must also state your intention to the bankruptcy court, the bankruptcy trustee, and the lender who is managing the lease agreement.

Before your bankruptcy court approves or rejects your Chapter 13 bankruptcy payment plan, you will need to decide whether to assume the lease or reject your existing vehicle lease.

In some situations, if the lender agrees, you may be able to negotiate a buyout to purchase the leased vehicle outright.

In the sections that follow, we consider each of your available choices for what to do with your existing car lease contract.

Giving Up the Lease

If you choose to give up the car lease, you will return the vehicle to the lender. You will no longer be obligated to make payments. 

But the creditor may claim the vehicle has been damaged or is subject to high mileage penalties. In this case, the creditor can file an unsecured claim with the bankruptcy court to recover damages for these claims and to add them to your other unsecured debts under the Chapter 13 payment plan.

The main advantage of giving up a car lease is that it frees you from the monthly payment obligation. If the payment amount is high, this can give you more money in your monthly budget and help you create an effective payment plan for your other debts.

Another potential advantage is that, even if the lender claims vehicle damage or excessive mileage, these become unsecured debts under the payment plan, which you may not be obligated to pay in full.

The main downside of giving up your car lease is that you immediately lose the use of the car. If the leased vehicle is your only car, this can leave you without private transportation.

Another possible drawback is that it can be challenging to get a replacement vehicle for the one you give up. Depending on where you are in your Chapter 13 case, you may be required to seek approval from the bankruptcy court before you can finance a car, and this can take time to do.

Keeping the Lease

If you decide to assume the lease, you must continue making payments under the original contract. If you have any back payments due, you must pay these through your Chapter 13 payment plan.

The court will approve this option only if it is financially beneficial and feasible within your repayment plan.

The original lease terms, including mileage limits and vehicle condition requirements, remain in effect. You must also maintain current car insurance and make timely payments to avoid default.

The main benefit of keeping your lease is that you do not lose the use of the car. This also means that you will not need to seek the approval of the bankruptcy court to obtain a different vehicle.

There are three main possible disadvantages to keeping the lease:

• Because the original lease terms remain in place, you remain subject to any leasing company claims concerning vehicle damage or excess mileage fees.
• If your lease term ends before the end of your payment plan period, you could find yourself without a vehicle and still need to get court approval to buy or lease another vehicle, facing the same potential complications as if you had given up the lease.
• The length of the lease does not change in Chapter 13 bankruptcy. Therefore, if you have a past due balance, you must make these late payments before the lease expires. Bankruptcy law entitles the creditor to have the late payments cured promptly.

Do You Have Questions about Chapter 13 Bankruptcy and Car Leases?

In this post, we have outlined the factors that determine whether you should seek a new lease if you are currently making payments under a Chapter 13 payment plan. We have also looked at whether you should keep or relinquish a leased vehicle if you are entering Chapter 13 bankruptcy.

The right option for you depends on your unique situation. At Stone Rose Law, we recommend you take the following questions into account:

• What are your current lease terms and remaining plan payments?
  
• What is the condition of the leased vehicle and its mileage?
  
• What are your transportation needs?
  
• What is your financial ability to continue making lease payments?
  
• How well does a car lease fit into your overall bankruptcy strategy?

An experienced Stone Rose Law Arizona bankruptcy attorney can help you evaluate these questions in a free initial consultation.

Call us at (480) 739-2448 or use our contact form to speak with one of our bankruptcy lawyers.