Pre-Bankruptcy Leased Vehicles Purchased After Expiration of the Lease: Are Such Agreements Enforceable?

14 Dec Pre-Bankruptcy Leased Vehicles Purchased After Expiration of the Lease: Are Such Agreements Enforceable?

It’s common for persons to lease a motor vehicle, rather than to purchase it using a traditional vehicle loan. It’s also common for such persons to file chapter 7 bankruptcy before the vehicle lease is finished. Often the debtor will continue making the payments on the vehicle, retaining it until the end of the lease term, without entering into a formal reaffirmation agreement with the lender (the “ride through” option). Often the lease will contain a provision allowing the debtor to buy the vehicle for a predetermined price at the end of the lease term. If the debtor buys the vehicle, financing is often obtained by the debtor from the same bank that financed the lease.

This presents the question whether the new loan is enforceable against the debtor in the event of a default, or whether the new loan is invalid for failure to comply with the bankruptcy code’s rules governing reaffirmed debts. Section 524(c) provides:

(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if

(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;

(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;

(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that (A) such agreement represents a fully informed and voluntary agreement by the debtor; (B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and (C) the attorney fully advised the debtor of the legal effect and consequences of (i) an agreement of the kind specified in this subsection; and (ii) any default under such an agreement;

(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;

(5) the provisions of subsection (d) of this section have been complied with; and

(6) (A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as (i) not imposing an undue hardship on the debtor or a dependent of the debtor; and (ii) in the best interest of the debtor. (B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.

If the vehicle lease was reaffirmed according to the requirements set forth in section 524, then there is little doubt that a subsequent purchase loan is enforceable. However, if the lease was not reaffirmed, then an argument can be made that when the lender extends new credit to finance the purchase of the formerly leased vehicle, for the price specified in the discharged lease agreement, the consideration for this purchase is now based “in whole or in part” on the discharged lease agreement.

This brings the new, post-bankruptcy vehicle purchase loan within the ambit of section 524(c), at least where the new lender is the same entity to whom the debtor owed the payments under the discharged vehicle lease, and where the purchase price is dictated to the debtor by the old lease.

Debtors who lease a vehicle and then purchase it later, after the bankruptcy is discharged, should be aware of this avenue of attack on the new loan’s validity, in the event of a default on the new loan. Even better is to avoid purchasing a leased vehicle which might be no more than an unpleasant reminder of the debtor’s prebankruptcy financial affairs.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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