Car Leases in Chapter 7 Bankruptcy

When you lease your car, it’s not treated the same as a purchased car with a loan. You, the debtor, are not the owner. Think of it this way – you are renting it… kind of like an apartment. At the end of the lease the car is returned or purchased.

In a Chapter 7 bankruptcy you will complete a Statement of Intention which will tell the lessor what you plan to do with the car. You can assume the lease or walk away. Most people want to assume the lease, but you must be current on your payments to do that. The lessor will send you a reaffirmation agreement you will have to fill out and sign.

What about equity. Equity in a car lease is different than equity in a car you have purchased. If you purchase the car, you just take the fair market value and subtract the loan balance. With a lease you must take the current market value and subtract the residual value. The residual value is the price you could buy out the vehicle for – often called the payoff amount. This can be ascertained by the leasing company.

Think of it as if you are the trustee. The trustee’s job is to see if there is any way to administer the property and get money to disperse to creditors. The way to do it is finding out what it would sell for and subtract from that what the lessor would accept to relinquish title. As such, if the pay off to purchase the car is less than the fair market value then there is equity. Unless the equity is exempt the trustee might take over the lease and dispose of the vehicle.