How Is A Leased Vehicle Treated In Bankruptcy?
Leased vehicles are treated very differently, and somewhat more simply, than financed vehicles in bankruptcy. In a typical lease, you will have paid an initial downpayment to get the vehicle, then signed a contract to make a fixed monthly payment for a fixed number of months in exchange for you driving the vehicle. At the end of the fixed term, you likely have the option of returning the vehicle (often with an additional payment if you drove over the prescribed number of miles or there is damage to the vehicle), or you can purchase the vehicle for a fixed amount. If you elect to purchase the vehicle, the same lender will often finance it for you.
When you file for bankruptcy protection, either Chapter 7 or Chapter 13, you basically have two options. You can assume the lease, meaning that you agree to continue with the terms of the original lease agreement. You will have to maintain payments on the lease and keep your insurance in place, as you would have without the bankruptcy filing. You can also reject the lease, breaking the contract, returning the vehicle and owing nothing to the lessor.
If you are behind on your lease payments and want to reject the lease and return the vehicle, the arrears and any other claims that the lessor may have are treated as unsecured debts in the bankruptcy and are discharged at the end of the case. If you want to assume the lease and keep the vehicle, the Bankruptcy Code requires that you cure the arrears (past due payments) in a timely manner (which is clearly subject to interpretation) and that you perform under the lease going forward (make payments, maintain insurance, etc).
It is worth noting here that other agreements that call themselves leases, such as rent-to-own agreements where the buyout at the end of the “lease” is $1, are generally recognized by the bankruptcy courts for what they are, traditional financing agreements. These are generally not bound to the requirements of true leases under the Bankruptcy Code.
