Leases fall into a separate category of debts when it comes to filing bankruptcy. The majority of debts are classified as either secured or unsecured. Secured debts are those for which the creditor has a lien on some property or collateral of yours. The most common example is the debt on a vehicle. When you buy a vehicle, unless you pay cash for it, you make payments on the debt you owe. The seller keeps a lien on the vehicle that enables them to repossess the vehicle if you default on the financing. Unsecured debts have no collateral. The creditor’s only legal option to collect the money is to file a lawsuit against you if you default.
Secured and Unsecured Debts
In a Chapter 13 bankruptcy, both secured and unsecured debts can be repaid over time through a payment plan. In a Chapter 7 bankruptcy, the court decides whether unsecured creditors will be paid anything and, if so, how much they will receive. For secured creditors, if the court decides not to liquidate the collateral, then you can often keep that item and continue to pay the secured creditor as though a Bankruptcy case never happened. This is a process called Reaffirmation. If you do not reaffirm a secured debt, then that debt is discharged. The creditor may repossess the collateral, but you cannot be held responsible for that debt in the future.
Leases are Contracts Not Debts
Leases, however, are treated as ongoing contracts. This is because a lease contract anticipates that you are going to be returning the vehicle to the creditor at a point in the future. This is different from a regular car purchase where the expectation is that you will keep the vehicle as your own. As a result of this difference, a person really has two options with leases in bankruptcy: Assume the lease or Reject it. This is true in both Chapter 7 and Chapter 13 cases.
Assuming a lease is like reaffirming a secured debt. You continue to be bound by the terms of the original lease contract. You must continue to pay the lease-holder if you want to keep the vehicle, and you must return the vehicle when the lease period is over. Bankruptcy allows you to reject a lease if you no longer wish to be bound by that contract. If you realize you are paying too much for a lease vehicle or other equipment, then you can declare that you’re rejecting the lease and free yourself from the contract. The lease-holder has the right to repossess the vehicle, but you can’t be held responsible for any more payments.
If you find yourself in a situation where your bills and expenses are starting to get overwhelming, consider making an appointment to speak with one of our experienced bankruptcy attorneys. At Bond & Botes we offer free initial consultations at all of our convenient locations in Alabama, Tennessee, and Mississippi. No matter what kind of debts you’re facing, we specialize in helping people find a way back to financial stability.