I recently had an exchange with a fellow bankruptcy attorney who expressed some confusion over the treatment of car leases in bankruptcy. His confusion arose because of something he heard a judge say at a hearing on reaffirmation. The judge’s comments appear to indicate that the distinction between lease assumption and debt reaffirmation is not clear in everyone’s mind. This post will clear up the confusion.
I. Reaffirming Secured Debts
I have already discussed reaffirmation of secured debts in great detail. The executive summary is this:
If you’re the debtor and you want to keep a car securing the car loan, you must either reaffirm the debt or redeem the car. If you reaffirm the debt you resurrect your in personam liability. If you redeem the car under § 722, you pay the car off in one big payment at current fair market value. According to 11 U.S.C. § 521(a)(6), if you fail to do either by 45 days after the first 341 meeting of creditors the creditor can repossess the car.
I have been referring to car purchases here because almost all reaffirmation agreements involve car loans. However, everything stated here applies, mutatis mutandis, to other non-real estate secured purchases.
As for reaffirmation of mortgage debts, in a word: DON’T. 11 U.S.C. §§ 524(c) and 521(a)(6) provide the requirement of reaffirmation if the collateral is personal property. No such requirement exists if the collateral is real estate. Moreover, my sense is that none of the judges in the Central District of California would approve the reaffirmation of a mortgage debt because of the magnitude of the liability involved, unless there has been a significant reduction in the principal balance.
II. Assuming A Lease
Leases are “temporary purchases” in the sense that while the lease is in effect you have exclusive use of the car. However, they are not real purchases because when the lease is up, you have nothing (except for the memory of when the dog threw up in the back seat on the way to the vet, which convinced you that he deserved to be neutered, and you don’t feel guilty even when he looks at you reproachfully because he had it coming). In other words, unlike a genuine purchase, you never really have an ownership interest in the car.
Technically, the relevant part of 11 U.S.C. § 365(p):
If a lease of personal property is rejected or not timely assumed . . . the leased property is no longer property of the estate and the stay under section 362 (a) is automatically terminated. . . . If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract. . . .
combined with the relevant part of § 365(d):
In a case under chapter 7 of this title, if the [debtor inheriting the trustee’s power to assume the lease pursuant to § 365(p)] does not assume or reject an executory contract or unexpired lease of . . . . personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
requires the assumption of a lease, rather than the reaffirmation of a lease. Otherwise, the automatic stay terminates with respect to the leased item (usually a motor vehicle) on the 61st day after the petition date.
Since § 521(a)(6) requires that reaffirmation be done no later than 45 days after the first § 341(a) hearing, rather than § 365(d)’s 60 days after the filing date requirement, lease assumption and debt reaffirmation as understood in the Bankruptcy Code are distinct concepts. Indeed, on an intuitive level it’s best to think of reaffirmation as a secured purchase concept (even though a debtor can, in theory, reaffirm an unsecured debt – though it is, admittedly, a bit unusual), and assumption as a lease concept.
Some creditors, such as Toyota, will ask you to sign a one-page lease assumption agreement, while others, such as Honda, demand a full-blown reaffirmation agreement in order to assume the lease. I have gotten nowhere pointing out the difference in concepts to Honda. Their policy is that you must sign a reaffirmation agreement to assume the lease. Therefore, if you want to assume a Honda lease, the better part of wisdom is to sign the reaffirmation agreement.
As for the aforementioned judge’s position, he is, after all, the final arbiter in the matter. Therefore, you’re in his courtroom and you want to keep a leased vehicle, you will have to reaffirm, unless the lessor doesn’t demand it. And who in his right mind is going to mount an appeal based on the somewhat arcane distinction between lease assumption and debt reaffirmation?