Car leases and Filing Bankruptcy
How does bankruptcy affect a car lease?
As the prices of cars continue to rise annually and people are looking to get a new car every few years, more and more people are turning to a car lease as a means to make owning a new car affordable. Unfortunately, more and more people are also running into situations—whether because of the loss of a job, bad investment decisions, or simply poor spending habits—that lead them to consider bankruptcy.
But if you choose to declare bankruptcy, what happens to your car lease? And what happens if your lease ends after bankruptcy and you are looking to obtain permanent financing for the car? Read on to learn more about this topic.
When You Declare Bankruptcy
When you declare bankruptcy, you need to make a decision on if you plan to continue leasing the car or you will let the car go back to the lessor. In general, whether you declare Chapter 7 or Chapter 13 bankruptcy, you will be able to choose either option.
Choosing to end the lease is commonly referred to as rejecting the lease. If you choose to reject the lease, the car will be returned to the lessor and any additional lease obligation you had that is not satisfied by sale of the car will likely be discharged as a part of the bankruptcy proceeding. This is because a lease obligation becomes unsecured debt in a bankruptcy much like a credit card balance.
If you choose to continue with the lease, this is commonly referred to as assuming the lease. To assume the lease, you will need to work with your lessor to bring any past-due payments current and to continue making lease payments through the agreed-upon term of the lease. In effect, when you choose to assume the lease, from the lessor’s perspective, the lease agreement will continue on unchanged. To keep the car, you will have to maintain current lease payments as though you never declared bankruptcy. And should you miss any lease payments, the lessor can take possession of the car and possibly pursue other steps available to them to satisfy any obligation you owe.
Whether you choose to reject or assume your car lease in a bankruptcy, it is important to you let your bankruptcy attorney know of your intention so that all involved parties can be properly informed and the lease can be treated correctly in the bankruptcy proceeding.
After Declaring Bankruptcy
As noted above, if you reject the lease at the time of declaring bankruptcy, you will have no further obligation related to the lease. However, if you assume the lease, the bankruptcy will affect what happens to the car at the end of the lease term. And the effect will vary based on the type of bankruptcy you use.
A Chapter 7 bankruptcy involves the elimination of much of your debt (as well as many of your assets, which will be seized to help pay your creditors). If you declare Chapter 7 bankruptcy, there are programs available to provide permanent financing for your vehicle at the end of your lease term. (After all, you are not the only one who has experienced this situation and lenders see it as an opportunity to make a profit.) But you can expect that the interest rate you can get with a bankruptcy on your record will be higher than you could get without the bankruptcy.
A Chapter 13 bankruptcy involves the reorganization of your debt. Under debt reorganization, the debts you owe will be restructured into an affordable payment plan. This plan will generally last for up to five years.
If you declared Chapter 13 bankruptcy, the length of the bankruptcy reorganization plan will come into play at the end of your lease term. Usually the term of a car lease will end before payments under a bankruptcy reorganization plan are complete. Therefore, if you want to obtain financing to purchase your car at the end of your lease term, you will need to start by obtaining approval from the bankruptcy court. If you receive approval from the bankruptcy court, again there are programs available to provide financing, but such programs will charge a higher interest rate than is offered to those without a bankruptcy on their credit.