What Happens to Car Leases in Bankruptcy?
Many people realize that they might lose personal property if they file for Chapter 7 bankruptcy protection. But what about property you don’t own but instead lease?
Thousands of people lease a vehicle, so they are naturally curious about what will happen to their lease in a bankruptcy. Let our Plantation bankruptcy attorney explain the options to you.
Option #1: Surrender the Vehicle and Your Lease
Though you signed a contract, you have the option to reject it in Chapter 7. This means you get to walk way free and clear. Obviously, this is a terrific benefit if you realize that you can no longer make your lease payments.
Of course, rejecting the lease means you turn over the vehicle, also. If this is your only car, then you will need to find alternate transportation. Some people find it difficult to obtain financing to buy a new car soon after bankruptcy, so thoroughly think through whether you want to surrender the lease.
There is one clear advantage to cancelling. Many leases set a limit for the maximum number of miles you can drive in a year (typically 10,000). If you go over, you must pay a penalty, typically charged by the mile. So someone who drove 15,000 miles in a year could be paying quite a lot. Fortunately, these charges are dischargeable in a bankruptcy, so you do not need to pay them.
Option #2: Assuming the Car Lease
You might be in love with your car and decide that you want to keep it. Fortunately, this is an option in most bankruptcies. Nevertheless, you should carefully consider what it means to assume the lease.
In short, you are not getting out of making payments. You are also not eliminating your responsibility to pay for excess mileage or to fix damage to the car. Instead, you will simply agree to continue with the terms of the initial lease—including the monthly payment. Should you miss a payment going forward, the lessor can repossess the vehicle, just as they could if you had never filed for bankruptcy.
Exercising Your Option
You will be required to tell the court what you plan to do with your car lease. You can tell the court when you file your petition or up to 30 days later. Your creditors will also receive notification so they can prepare for your assuming or cancelling the lease.
When you meet with an attorney, discuss the pros and cons of each option. For example, you might be afraid you cannot find another vehicle, so assuming the lease might be the best option for you. However, if you cannot afford a lease going forward, then there is little reason to assume a lease that will only cause financial distress.
Let’s Talk it Over
Nowack & Olson, PLLC has helped more than 20,000 consumers discharge all kinds of debt. Our experience with Chapter 7 bankruptcies is considerable. To learn more about your options, please call us to schedule your free consultation at 888-813-4737.