What Happens to Car Leases in Bankruptcy?

When filing for bankruptcy, most people want to be able to retain as much normalcy as possible. One thing that potential bankruptcy filers are often concerned about is their car. If you live in Maryland, you know that you basically need a car to survive and function here. Therefore, wanting to know about the fate of one’s car is totally understandable.

The answer to the question of what happens to car leases in bankruptcy depends, like many things in bankruptcy, on your situation.

When you file for bankruptcy, it starts an automatic stay, which freezes all collection actions, including collections for your car lease. If you are behind on your lease payments, the car lessor will usually ask the court to lift the stay on collections for the lease. If they are successful, they may be able to resume collection actions and sue for repossession of the car.

If they are unable to get the stay lifted, the lease is then considered along with the rest of the debts and assets by your bankruptcy trustee (a sort of bankruptcy case supervisor). The bankruptcy trustee can then either decide to assume the lease or reject the lease. If they assume the lease, it will be as an asset to your estate. This means that they will try to use it to raise money to repay your creditors (by, for instance, selling the duration of the lease to a third party). However, if they decide not to assume the lease, you now have the option to assume or reject the lease.

Assuming the lease continues the lease contract under its previous terms. Rejecting the lease ends the contract and generally means surrendering the car.

If you choose to assume the lease, the State of Maryland requires you to sign a Lease Assumption Agreement. This is a binding contract that reaffirms your commitment to the lease. It’s very important to remember that these agreements are non-rescindable. Once you have signed and filed, you cannot change your mind. Lease Assumption Agreements also stipulate that all charges from that point forward can be pursued as if you had never declared bankruptcy. This means that they can pursue collections from you if you default on your payments, or incur charges as laid out in the lease (often including charges for damages when you return the car, as well as charges for going over-mileage, at the end of the lease). If you owed back-payments on the lease when you filed for bankruptcy, the leaseholder may also be able to hold you responsible for those payments. If you reject the lease, you cannot be held responsible for any of those debts.

You may be a good candidate for assuming a car lease if:

• Your car payments are low, and you have a reliable way to make them each month
• You were current on lease payments when you filed for bankruptcy, or have enough money to make back-payments
• You are not over-mileage or close to over-mileage, or
• You intend and are able to purchase the vehicle at the end of the lease.

It is generally advisable not to assume the lease if:

• You do not have a way to keep up with the payments
• You had fallen significantly behind on lease payments before filing for bankruptcy, and have no way to repay those debts
• You are over-mileage or will be over-mileage by the end of the lease.

Are you considering filing for bankruptcy? Do you have questions about your options under Maryland bankruptcy law? Attorney Jillian Kindlund has answers. Ms. Kindlund offers exemplary bankruptcy representation to the Bethesda, MD and greater Montgomery County community. Want to know more? Don’t wait. Call (240) 997-5775 or reach out online to schedule your free consultation today.