What Happens to My Leased Vehicle in a Bankruptcy?

Debtors can assume or reject their vehicle lease agreements in bankruptcy.

Knowing how lease agreements are treated under the Bankruptcy Code is important if a debtor is leasing a vehicle when he files for bankruptcy. Disclosing the existing lease agreement in the bankruptcy case is required. The debtor needs to decide if it is in his best financial interests to assume or reject the lease agreement and must understand the consequences of either option.

Include Lease in the Bankruptcy

List the lessor of the vehicle as a creditor in the bankruptcy case. Provide the lessor's name and address. Give the year, make and model of the leased vehicle. The lessor needs to be informed when a bankruptcy case is filed. The bankruptcy court will mail a notice of bankruptcy filing to the address listed in the bankruptcy petition. Once the leasing company is notified of the bankruptcy case, it will be able to assert any rights it has under the Bankruptcy Code in order to protect its interests.

Assume the Lease

Debtor's have the option to assume the lease under 11 U.S.C. §365. Some court districts require a debtor sign an assumption agreement if he wants to retain the vehicle. Other court districts allow the debtor to keep making payments for the vehicle without a formal agreement being filed with the court. Signing an assumption agreement means the debtor will continue to comply with the terms of the lease agreement. Some assumption agreements may state that the debtor remains personally liable for any debt that is accrued under the lease agreement. Consult with a bankruptcy attorney to find out the procedures regarding lease agreements in the district. The bankruptcy attorney can also confirm whether there is any personal liability associated with assuming the lease.

Reject the Lease

Debtors are permitted to reject the lease agreement in the bankruptcy. When the lease is rejected, the leasing company can file a motion with the bankruptcy court requesting the right to repossess the vehicle. Debtors should state explicitly in the bankruptcy petition that the lease will be rejected. If the debtor wants to keep the vehicle but doesn't follow the proper procedures with the court and the lessor, the lease will be rejected by default. The vehicle will no longer be part of the bankruptcy estate and the lessor can regain possession of the vehicle.

Lease Deficiencies

When the debtor rejects or surrenders the leased vehicle, the leasing company can file a proof of claim for the outstanding balance owed under the lease. The leasing company's claim will be classified as an unsecured nonpriority debt. Therefore, when the bankruptcy case is discharged, any remaining financial obligation the debtor owes under the lease will be relieved by the bankruptcy court.

References

• Cornell University Law School: §365 Executory Contracts and Unexpired Leases
• Cornell University Law School: §521 Debtor's Duties
• Bankruptcy Law Network: Over Mileage Vehicle Leases in Chapter 7 and Chapter 13
• U.S. Courts: Bankruptcy Forms