Rent to Own Contracts under CBRA
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The Consumer Bankruptcy Reform Act of 2020 creates a consumer-focused alternative to Section 365 that lays out how a bankruptcy filing impacts a rent-to-own contract.
Written by Your Upsolve Team.
Updated May 11, 2022
Even though terms are rarely favorable, a considerable number of people use rent-to-own purchase contracts to buy personal property like appliances, electronics, and even furniture. The Bankruptcy Code in its current form governs rent-to-own contracts via Section 365.
CBRA creates a consumer-focused alternative to Section 365 that lays out — in plain language — how a bankruptcy filing impacts a rent-to-own contract. It’s important to note that this new Section 1007 applies to any rent-to-own contract for personal property “irrespective of form.” In other words, clever lessors can’t get around its provisions by calling their agreement something else or structuring it in a different way.
Treatment of Rental Purchase Agreements
CBRA’s Section 1007 governs contracts for:
The use of personal property (other than a vehicle),
That the debtor is using in their private life (for a personal, family, or household purpose)
Where the contract renews with each payment, and
Where the debtor is permitted, but not obligated to become the owner of the property
No Ownership Interest for the Seller
CBRA makes it clear that no matter what the contract or underlying state law may provide, the seller-lessor (places like Aaron’s Furniture or Rent-A-Center) do not have an ownership interest in the item.
Under CBRA, it would be up to the debtor to decide whether they wish to keep the property they’re purchasing in installments or terminate the contract. If they want out of the contract, they can get out and return the property. But if they wish to keep the property, they can elect to do that as well.
If the debtor elects to keep the property in their possession, the seller’s claim is the sum of accrued and unpaid rent and future rent and other payments due under the contract. The latter appears to apply only if the debtor elects to purchase the property through the contract, so further investigation is needed as to the true intent and purpose of this section.
Either way, it makes it clear that neither the consumer debtor nor the consumer debtor’s attorney have to venture into the proverbial weeds of Section 365 only to deal with a rent-to-own dining room set. If you want to keep it, you pay for it. If you don’t want to keep it, you get out of the contract.
Effect of the Discharge
Once the debtor receives a discharge under Section 1028 of CBRA, any attempt by the lessor to exercise their rights under the agreement or applicable nonbankruptcy laws shall be deemed a violation of the discharge injunction under 11 U.S.C. 524(a).
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What Does This Mean for Consumers?
From the point of view of a consumer bankruptcy attorney, this is a good development. Often, the debtor just wants to “keep everything the same,” so they’re not forced to figure out how to get a new bedroom set for their kids by the time all is said and done.
While many of CBRA's provisions are drawing criticisms from all sides, this seems like a common-sense solution to a problem that doesn’t have to be one. Let’s hope that whatever consumer bankruptcy reform ultimately looks like, it contains a provision providing answers to lessors and lessees about how a bankruptcy filing impacts their rights.