Legal Question in Bankruptcy in Illinois

Re: Car leases pertaining to bankruptcy

Car leases must be listed, and the lease may be assumed and re-affirmed or abandoned and the car go back to the creditor. Debtors will find most lease co's want to reaffirm, but it is not guaranteed, a chapter 13 plan could gaurantee the lease will be honored by confirmation of the plan.

Re: Car leases pertaining to bankruptcy

Short answer -- you probably "own" the car in spite of the lease and you would be eligible to exempt the vehicle and keep it provided it is not overly valuable.

Under Illinois law you can exempt from creditors the equity in an automobile for up to $1,200. This "exemption" (bankruptcy term for property you are entitled to keep in spite of creditors after you file) can be used one time by each person filing in the case of a joint filing. For example, if you have a Buick and your spouse has a Lexus, you can each retain your respective cars if you owe more on the loans then the cars are worth. If you owe $7,000 on the Buick and the car is worth today about $8,000; then there is only $1,000 in equity and the exemption law allows for you to retain possession. In other words, the Bankruptcy Trustee cannot force the sale of the Buick to pay creditors. If however, the loan payoff for the Lexus is $10,500 and the value of the car is $16,000 then the $5,500 equity is in jeopardy.

However, Illinois law provides for another exemption of up to $2,000 that can be applied to any personal property so if your car is worth more than $1,200 you could apply if needed another $2,000 and exempt a car that had a value of up to $3,200.

The fundamental principles of the "bankruptcy estate" are key to an answer to your question with respect to car leases. Often, a "lease" in reality is not a true lease but in fact a disguised sale plus a security interest in the goods. My hunch is this is the case with most car leases. Basically, if the "lease" allows the lessee to buy the goods for a small amount of money at the end of the lease term, or if the "lease" runs for the entire useful life of the goods, then the "lease" is really a sale.

The reason this is important is because of the concept of the "bankruptcy estate". If the car is not really a leased good then it is personal property (which you own) and is subject to the realm of bankruptcy ("bankruptcy estate") and the power of the bankruptcy Trustee. (All of the issues discussed above involving exemptions would come into play)

If the car is truly a lease then in theory you don�t own anything and the value of the car for purposes of exemptions is not at issue. You would not have to be concerned with reaffirmation either. Perhaps a good strategy (if the equity is high) would be to classify the car as a lease vehicle and just continue making the payments. Then it will be up to the Trustee or the car finance company to attempt to reclassify the �lease� as a sale. In a practical sense the Trustee may or may not make an issue of this.

Finally there is no monetary limit to reaffirmation agreements. Of course, if the equity of the car you are attempting to reaffirm is greater than $3,200 then you have a problem. ph. (800) 303-0720