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One of the most common questions people ask before filing Chapter 7 bankruptcy is:
“What happens to my leased vehicle?”
The good news is that filing Chapter 7 bankruptcy does not automatically mean you have to give up your leased car. In many cases, you can continue driving it and making the monthly lease payments.
The more difficult question is whether you should sign a lease assumption agreement after filing bankruptcy.
For many consumers, signing one is not in their best interest.
Let’s look at how leased vehicles are treated in Chapter 7 bankruptcy and why carefully considering a lease assumption agreement is so important.
What Happens to a Vehicle Lease in Chapter 7?
Unlike a vehicle loan, a lease is considered an executory contract under the Bankruptcy Code.
When you file Chapter 7:
- The bankruptcy trustee generally has no interest in keeping your vehicle lease.
- If you want to keep driving the vehicle, the leasing company may allow you to continue making payments.
- Some leasing companies ask debtors to sign a Lease Assumption Agreement under 11 U.S.C. §365(p).
The important question becomes whether you should sign that agreement.
Lease Assumption vs. Reaffirmation Agreement
Many people assume a lease assumption agreement is simply another type of reaffirmation agreement.
It is not.
Reaffirmation Agreement (§524)
A reaffirmation agreement applies to debts, such as:
- Auto loans
- Credit cards (rare)
- Personal loans
Congress built numerous protections into reaffirmation agreements because they remove a debt from the bankruptcy discharge.
Those protections include:
- The agreement must be signed before discharge
- Extensive statutory disclosures
- A cooling-off period allowing rescission before discharge or within 60 days after filing the agreement
- Filing with the bankruptcy court
- Attorney certification if represented
- Court approval in some circumstances
These requirements exist to protect debtors from giving up their bankruptcy discharge without fully understanding the consequences.
Lease Assumption Agreement (§365(p))
A lease assumption agreement is different.
Section 365(p) governs the assumption of personal property leases in Chapter 7.
Generally speaking:
- The debtor notifies the lessor that they wish to assume the lease.
- The lessor agrees.
- The parties sign an assumption agreement. It is not filed with the bankruptcy court, but is nevertheless binding.
Once assumed, the debtor—not the bankruptcy estate—becomes liable under the lease.
Unlike reaffirmation agreements, Section 365(p) contains none of the consumer protections found in Section 524.
Why Many Bankruptcy Attorneys Recommend NOT Signing a Lease Assumption Agreement
Many leasing companies will simply accept your monthly payments after bankruptcy without requiring a formal assumption agreement.
If that happens, you often receive a significant benefit.
You keep the vehicle…
You continue making your monthly lease payments and driving the vehicle just as before.
…but your personal liability may be discharged.
Because you did not assume the lease, many bankruptcy practitioners take the position that your prepetition contractual liability has been discharged.
This can have important consequences at the end of the lease.
Potential Benefits
If you simply continue making payments without assuming the lease:
- You may avoid liability for excess mileage.
- You may avoid liability for excess wear and tear.
- You may avoid other end-of-lease charges.
- If you later cannot continue making payments, you may be able to surrender the vehicle without owing a deficiency or remaining lease obligations.
Every leasing company handles these situations differently, and the law is still developing in some areas. However, avoiding a lease assumption agreement often preserves the fresh start that bankruptcy is intended to provide.
The Downside of Signing a Lease Assumption Agreement
When you sign a lease assumption agreement, you are voluntarily agreeing to become personally liable again.
That means if you later:
- exceed the mileage allowance,
- return the vehicle with excessive wear,
- terminate the lease early, or
- default on future payments,
the leasing company may pursue you personally for those obligations despite your bankruptcy discharge.
Many consumers sign these agreements believing they are merely “keeping the car.”
In reality, they may be giving up valuable bankruptcy protections.
Michigan Federal Court: Once You Assume the Lease, You May Not Be Able to Change Your Mind
A significant Michigan decision illustrates the risks.
In Williams v. Ford Motor Credit Co., LLC, the debtors filed Chapter 7 and indicated they intended to assume their Ford lease.
After filing bankruptcy:
- Ford sent a lease assumption agreement.
- The debtors signed it.
- Ford filed the stipulation with the bankruptcy court.
Shortly thereafter, the debtors changed their minds and attempted to rescind the agreement before receiving their discharge.
They argued that the lease assumption was invalid because it did not comply with the reaffirmation requirements of 11 U.S.C. §524, including the statutory disclosures and rescission rights.
Both the bankruptcy court and the federal district court rejected that argument.
The court held that lease assumptions under 11 U.S.C. §365(p) are separate from reaffirmation agreements governed by §524.
Because Congress specifically created a separate procedure for assuming personal property leases, the court concluded that compliance with the reaffirmation statute was not required.
As a result, the debtors remained bound by the lease assumption they had signed.
What Did the Court Say Is Required for a Valid Lease Assumption?
According to the district court, an enforceable lease assumption under Section 365(p) generally requires:
- The debtor offers to assume the lease.
- The lessor agrees.
- The parties sign an agreement memorializing the assumption.
The court held that the additional reaffirmation requirements found in Section 524 simply do not apply.
Not Every Court Agrees
The issue has divided bankruptcy courts around the country.
Some courts—including the court in In re Perlman and the court in In re Mortensen—have concluded that Section 365(p) operates independently from Section 524.
Their reasoning includes:
- Congress intentionally omitted any reference to reaffirmation.
- Requiring reaffirmation would make Section 365(p) largely meaningless.
- A creditor and debtor should be able to enter an enforceable lease assumption without layering reaffirmation requirements on top of it.
Other courts—including Thompson v. Credit Union Financial Group—have expressed concern that allowing lease assumptions without reaffirmation protections undermines the Bankruptcy Code’s fresh-start policy.
These courts reason that because a debtor is once again becoming personally liable, the consumer protections contained in Section 524 should also apply.
The law therefore remains unsettled in some jurisdictions.
Practical Advice Before Signing Anything
Many consumers receive a lease assumption agreement shortly after filing bankruptcy and assume they must sign it to keep their vehicle.
That is often not true.
Before signing, ask questions such as:
- Is the leasing company actually requiring an assumption?
- Will they simply continue accepting monthly payments?
- What happens if I return the vehicle with excess mileage?
- Will I remain liable for excess wear and tear?
- Could signing the agreement eliminate bankruptcy protections I would otherwise receive?
The answers can make thousands of dollars’ difference when the lease ends.
The Bottom Line
If your goal is simply to continue driving your leased vehicle, do not assume that signing a lease assumption agreement is required—or beneficial.
In many Chapter 7 cases, continuing to make the monthly lease payments without signing an assumption agreement may preserve your bankruptcy discharge while allowing you to keep driving the vehicle. If the lease is later returned, you may be in a much better position to argue that end-of-lease charges such as excess mileage, excess wear and tear, or other contractual liabilities were discharged in your bankruptcy.
On the other hand, if you sign a lease assumption agreement under 11 U.S.C. §365(p), you may once again become personally liable for those obligations. As the Michigan federal court held in Williams v. Ford Motor Credit Co., LLC, once the assumption agreement is properly executed, you may not be able to rescind it simply because it does not satisfy the reaffirmation requirements of 11 U.S.C. §524.
For that reason, every Chapter 7 debtor with a leased vehicle should carefully review any proposed lease assumption agreement with an experienced bankruptcy attorney before signing it. A decision that takes only a few minutes can determine whether your bankruptcy truly provides the fresh start that Congress intended.
