22 May Over Mileage Vehicle Leases in Chapter 7 and Chapter 13
If you file bankruptcy and have a vehicle lease, your choices regarding the vehicle are more complicated than if you own the vehicle subject to a secured loan. In the case of a secured vehicle loan, the bankruptcy law requires that you:
- Reaffirm the vehicle loan (keep the vehicle and continue the payments);
- Surrender the vehicle (usually discharging the loan balance); or
- Redeem the vehicle (pay it off in one lump sum payment amounting to the vehicle’s fair market value, usually discharging the remaining balance).
Occasionally, you can informally retain a secured vehicle by doing none of the above, and simply continue sending in the monthly payments (retain and pay). This only works if the lender is willing to let you keep the secured vehicle without a formal reaffirmation of the loan.
With a vehicle lease, the bankruptcy law requires something different: you must either assume or reject the lease. In chapter 13, this is normally done through a provision in the chapter 13 plan saying you will continue the payments and assume the vehicle lease.
While this means you can keep the vehicle (unless your plan is challenged), there is a danger that you will be over mileage when the vehicle is turned in at the end of the lease term, or that you will default on the lease payments during the plan and the vehicle might be repossessed after a motion by the lender. In either event, the balance owed might become an expense which some courts have held must be paid in full through the plan. If the balance is high enough, this could be an insurmountable obstacle to completing the plan.
In chapter 7, lenders will often allow you to keep a leased vehicle as long as you continue making the payments. Sometimes, the lender may ask that you sign an “assumption agreement,” promising that you will continue making payments on the vehicle. However, it is rare for a lender to insist that you make the choice of either formally assuming the lease (or reaffirming the debt), or surrendering the leased vehicle. There is a good argument that even if you assume the lease, without a formal reaffirmation, the lender cannot pursue you for payments after the bankruptcy. This is because the discharge injunction of section 524 has no exception for assumed leases. If so, this has the happy effect of allowing you to keep the leased vehicle, without having to pay anything to the lender once the vehicle is turned in or repossessed.
This is particularly beneficial to the chapter 7 debtor whose leased vehicle is over mileage. The lender is usually unaware of the vehicle’s mileage, so the lender may not perceive the benefit it would obtain by insisting on a reaffirmation (or possibly an assumption). In this situation, you may be able to simply continue payments on the leased vehicle after the chapter 7, retaining possession until the end of the lease term. When the over mileage vehicle is finally turned in to the lender, it will be legally prevented by the discharge order from collecting any over mileage penalty from you.
As noted above, this may be true even if you have signed a lease assumption agreement with the lender. The result is that leased vehicles that are over mileage can, in many cases, be retained after a chapter 7 and then surrendered later without fear of actually having to pay the over milage penalty.
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