How Does Bankruptcy Affect a Car Lease?
Car leases are treated as contracts in bankruptcy, not debts like car loans. In Chapter 7, you can continue your lease if payments are current or return the car and eliminate any charges. Chapter 13 offers more options to catch up on past-due lease payments over time.
Get Free ConsultationFinding information about cars and bankruptcy is easy when you own the vehicle. But leased cars work differently. The day-to-day experience feels the same. From a legal standpoint, leases and loans are worlds apart.
You need to understand these differences before filing bankruptcy. Your lease status determines your options. Your bankruptcy chapter matters too.
Unsure If You Qualify for Chapter 7 or Chapter 13?
Your car lease options depend on which bankruptcy chapter fits your situation. Get a free consultation to understand if you qualify for Chapter 7 or if Chapter 13 offers better options for keeping your leased vehicle.
Check If You QualifyWhat’s the Difference Between a Car Loan and a Car Lease?
Car leases and loans share some similarities. You possess the car in both situations. You can drive it as long as payments continue. Stop paying and you risk repossession.
But leases and loans aren’t the same thing. A car lease is a contract. A car loan is a debt. With a loan, you eventually own the car. With a lease, you return it.
The biggest difference? Legal ownership of the vehicle.
How Car Loans Work
Your lender essentially buys the car for you. You pay them back over time. You legally own the car from day one.
The security agreement gives your lender specific rights:
- The lender places a lien on your car title
- They hold the title until you pay off the loan
- They can repossess the car if you miss payments
- They may have rights related to insurance and repairs
The unpaid balance is a secured debt. Your car serves as collateral for the loan.
How Car Leases Work
You don’t own a leased car. The arrangement resembles renting an apartment. You pay the owner monthly for a set period. You get to use the car during that time.
At the end of your lease term, you return the car. The dealership or leasing company still owns it. Stop making payments and you lose your right to use the vehicle.
Some leases include a purchase option at the end. You can buy the car at a discounted price. But an option doesn’t transform the lease into a loan. Until you exercise that option, you’re still leasing.
Leasing Terminology You Should Know
Auto leasing uses specific terms:
- Lessee: You, the person making payments to drive the car
- Lessor: The dealership or company that owns the car
- Lease: The contract between you and the lessor
- Lease payment: Your monthly amount due to the lessor
A vehicle lease isn’t a debt. The lessor isn’t a secured creditor. Lease payments don’t appear on your credit report. Exception: unpaid charges at lease end, like excess mileage fees.
What Happens to Your Car Lease if You File Bankruptcy?
Your bankruptcy type affects your lease options. Your lease status matters too. Whether you want to keep the car plays a role.
You must disclose your leased car in your bankruptcy forms. Don’t include it with property or debts. Car leases belong on Schedule G of your forms.
You’ll need the lessor’s name and mailing address. Describe the lease as “car lease” with make, model, and year. Note when the lease expires.
Car Leases and Chapter 7 Bankruptcy
Chapter 7 requires a Statement of Intention. You tell the lessor what you plan to do. The form offers two choices:
- Mark “yes” if you want to continue the lease
- Mark “no” if you want to return the car
You must file your Statement of Intention within 30 days. Miss this deadline and the automatic stay lifts. The lessor can then repossess your vehicle.
Most people file their Statement of Intention immediately. Don’t risk losing automatic stay protection.
Continuing Your Lease and Keeping the Car
Current on payments? You can assume the lease. Your lease continues as if bankruptcy never happened.
You must keep making monthly payments until lease expiration. All original terms and conditions still apply. The lessor can still charge mileage or damage fees. Miss payments and they can repossess the car.
The lessor might send a reaffirmation agreement. Reaffirmation agreements are for secured debts, not leases. You don’t need to sign one to assume a car lease.
Some lessors insist anyway. Signing may be easier than fighting. The bankruptcy judge must approve all reaffirmation agreements. You can explain at the hearing that it’s a lease.
Behind on Lease Payments When Filing Chapter 7
Want to keep your car but behind on payments? You can catch up quickly after filing. Payments must usually be current when the lessor receives your Statement of Intention.
Your lease gives the lessor rights if you default. How far behind you are matters. The lessor isn’t required to continue the lease if payments weren’t current.
Can’t catch up in time? You can’t assume the lease in Chapter 7. Return the car and you won’t owe anything else. Still want to keep it? Speak with a bankruptcy attorney for free about Chapter 13.
Returning the Car and Walking Away
Don’t want to continue your lease? Chapter 7 provides an exit. Mark “no” on your Statement of Intention. You’re rejecting the lease.
You don’t keep the car. But you don’t pay further payments, fees, or charges either.
Many reasons exist for rejecting a lease. Maybe your income dropped since you first leased the car. Maybe the vehicle has damage or high mileage. You don’t need to explain your reason.
The lessor might file a motion to lift the automatic stay. Or they’ll wait 30 days for it to expire. Contact them to arrange pickup or drop-off.
List the lessor on Schedule F when rejecting a lease. Rejecting counts as a default. Under lease terms, you owe remaining payments plus additional charges. Mark the box next to “unliquidated” for this debt. Estimate the amount or write “unknown.”
Car Leases and Chapter 13 Bankruptcy
Chapter 13 offers more complicated options than Chapter 7. Current on payments and want to keep the car? Continue making monthly lease payments. Note on your Chapter 13 plan that you’re paying outside the plan.
Behind on payments but want to keep the car? Spread the past-due balance over your 3-5 year plan term. Each month you’ll pay the regular lease payment plus some past-due amount.
The bankruptcy judge may not allow this approach. Courts won’t confirm plans where you pay monthly and still lose the car. Exceptions exist for reliable cars with low lease payments.
Some leases include a purchase option through a balloon payment. You typically take out a car loan to pay this large end-of-lease payment. The loan works like any other car loan.
Filing Chapter 13 near lease end with a balloon-payment option? You may spread the balloon payment over your entire plan term. Again, courts usually require this to be in your best interest.
Protect Your Rights During Bankruptcy
Car leases receive different bankruptcy treatment than car loans. A loan is a secured debt on property you own. A lease is a contract for property someone else owns.
Chapter 7 lets you continue your lease if payments are current. Otherwise, return the car and eliminate lease-related charges. Chapter 13 provides more flexibility for catching up on past-due payments.
Understanding your options helps you make the right choice. Your lease status and bankruptcy chapter determine your best path forward.