Debtors Can Lose The Lease In Chapter 7 Bankruptcy. Why?

22 Jun Debtors Can Lose The Lease In Chapter 7 Bankruptcy. Why?

My colleague, Kurt O’Keefe, of Michigan, recently wrote regarding the difference between reaffirming a lease and reaffirming a secured loan on a vehicle. He stated throughout his article that a lease was a different type of animal — neither secured or unsecured and a lease can be assumed or rejected. His final point was that assumption of a lease did not mean that a debtor was again personally liable on the debt (the opposite of what would happen in a secured loan situation). However, there is more to the issue.

Whena Chapter 7 bankruptcy is filed, one of the forms filed with the court is a Statement ofIntention. That Statement tells creditors what the the intention is regardingleased property and secured debts.Since 2005 and the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act, chapter 7 debtors are limited to three choices: (1) surrendering the item that secures the debt or lease (2) redemption of the secured item by paying the creditor the market value of the item or (3) reaffirmation of the debt, meaning that the debtor agrees to pay the debt and the creditor can pursue the debtor after bankruptcy if the debtor fails to follow through with the payments (and also repossess the secured item, usually cars). The Statement of Intention indicates whether the debtor is willing to assumeor wants to reject. However, it is not up to the debtor whetherthe contract continues in a Chapter 7. The decision belongs to the Trustee and the Creditor according to a recent Oregon Bankruptcy Court decision.

In 2010, chapter 7 bankruptcydebtors in Oregon, brought a lawsuit following their discharge against Ford Motor Credit. FordMotor Credit repossessed their leased automobile following discharge and while the debtors were current with payments. The debtors, Michael and Jamie Smith, hadreceived a reaffirmation agreement fromFord Motor Credit, which the Smiths filled out andreturned to Ford. However, the reaffirmation agreement was never filed with the Court. The Chapter 7 Bankruptcy Trustee specifically declined to assume the contracton behalf of the debtors’ estate. The defendant, Ford, brought a motion to dismiss. The Court granted the motion and summarized its decision:

1) Debtor must within 45 days of the petition date file a statement of the debtor’s intention to assume a lease.
2) Assuming the trustee does not assume the lease within 60 days of the petition date (failure by the trustee to assume constitutes a breach of the lease agreement), the debtor must then notify the creditor in writing of the debtor’s desire to assume the lease.
3) Whatever the debtor’s intentions, if the trustee does not assume the lease, the leased property ceases to be property of the estate and continuation of the lease by the debtor is at the option of the lessor, who may choose to pursue its state law remedies for breach of its lease agreement. (emphasis added)

Smith v. FMCC, 10-6091-fra, In re Smith, 09-64658-fra7 (Oregon, 9/13/10).

In the Smith case, the vehicle was not mentioned on the personal property schedule (Schedule B); the lease was properly mentioned on the lease/executory contract schedule (Schedule G). However, on the Statement of Intention, no mention of the lease or the vehicle was on the Smith form.

The Court found that the debtors had not complied with the 45-day requirement and that 11 USC Section 365(d) provides that the trustee may assume or reject the lease. If the trustee rejects the lease, then at the lessor’s option, the lease may be assumed. If the creditor doesn’t want to allow the assumption, then the creditor can resort to state law breach of contract remedies and repossess the vehicle (even if, as in the Smith case, the debtors were current on the lease payments). The court then dismissed the complaint as there had been no violation of the bankruptcy code by Ford Motor Credit.

Chapter 7 Debtors beware!! A Creditor may decide that aleased vehicle is valuable enough that the Creditor will not allow assumptionof a lease by debtors.

photo: istock.com

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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