Car Leases and Chapter 7 Bankruptcy
If you’re struggling with debt and looking for a way out, you may wonder what will happen to your car lease in Chapter 7 bankruptcy.
Can you keep it? Will the lease be canceled? What if you’re behind on payments?
These are common questions, and as a Memphis bankruptcy lawyer, I can help you understand your options and how a car lease fits into the Chapter 7 process.
First, Is a Car Lease Treated Like Other Debt?
A car lease is a contractual obligation, just like a credit card or personal loan. When you file for Chapter 7 bankruptcy, you have to list your lease in your paperwork. That’s true whether you’re current on payments or not.
From there, you have a few choices depending on your financial situation and your goals.
Option 1: Reject the Lease and Return the Car
If the car is too expensive, you don’t use it anymore, or you’re just ready to walk away, Chapter 7 gives you the option to surrender the vehicle and cancel the lease. This is called rejecting the lease.
Here’s what happens if you go this route:
- You return the car to the leasing company.
- Any fees or penalties for breaking the lease early (like remaining payments or mileage charges) are wiped out in your bankruptcy.
- You walk away free and clear.
This is a great option if the car lease is a financial burden or no longer fits your needs.
Option 2: Assume the Lease and Keep the Car
If you like your car and can afford the monthly payments, you can choose to assume the lease. This means you agree to keep making payments on the lease after your bankruptcy is over.
There are some important things to know about choosing this option:
- You have to be current on your payments or able to get current quickly.
- The leasing company has to agree to let you assume the lease.
- Once you assume it, you’re locked into the lease again… even if you later hit financial trouble.
This option works best if the car is a good deal and you need it to get to work or take care of your family.
At my Memphis, bankruptcy firm, I often see clients who aren’t able to get current on their car leases. After all, if you had that kind of money available, you might not be thinking about bankruptcy at all.
That doesn’t mean you would lose any ability to have a car. But it might mean you need a change from your current situation. We can help you figure out which option is best.
What If You’re Behind on Payments?
If you’re behind on your lease when you file, the leasing company can request that you return the car or let you catch up over time.
It depends on the company’s policies, but a lot of companies will be hesitant to give you leeway because of the nature of Chapter 7.
Chapter 7 doesn’t give you a long-term way to catch up on debts like Chapter 13 does. So if you’re more than a couple of payments behind, the lease company may not let you keep the car, even if you want to.
But don’t worry: If Chapter 13 might be a better fit for you and your specific goals, we’ll always discuss that with you at your free consultation.
Does Filing Bankruptcy Affect Your Ability to Lease in the Future?
Your credit will take a hit after filing Chapter 7, and that may make it harder to lease another car right away.
But many people are surprised to learn that they receive car loan offers within months of discharge.
The key is to remain careful with your debt so you don’t get into trouble again. And work to rebuild your credit, which is an important part of life after bankruptcy.
We offered two free reports that can help you at this stage:
- Life After Bankruptcy, which explains what options you’ll have in those first few months and years after filing, and
- Rebuilding Your Credit, a step-by-step guide to building your credit to an A rating, even after bankruptcy.
You can order these today, free of charge, no strings attached.
Let’s Talk About What’s Right for You
Deciding what to do with a car lease in bankruptcy isn’t always simple. You have to weigh your finances, your transportation needs, and your long-term goals. That’s why it helps to talk to an experienced bankruptcy lawyer.
If you’re in the Memphis area and thinking about filing Chapter 7, I can help you decide whether keeping or surrendering your leased car makes the most sense. Let’s make sure you come out of bankruptcy with a plan that works for your future.
Call 901-327-2100 today for a free consultation or just contact us online, and take the first step toward financial relief.