Filing for bankruptcy is a big step that can impact many parts of your financial life, including what happens to your car lease. If you’re considering Chapter 7 bankruptcy, it’s helpful to understand what it might mean for your lease. This post covers how Chapter 7 bankruptcy could affect your car lease and outlines the options you might have.
Understanding the Basics: Car Loan vs. Car Lease
Before we dive into the details, let’s clarify the difference between a car loan and a car lease since each comes with unique implications.
- Car Loans: With a car loan, you’re on the path to ownership. You borrow money to buy the vehicle, make monthly payments to pay off the loan, and eventually own the car outright. Until then, the lender has the right to repossess the vehicle if you can’t keep up with payments.
- Car Leases: A lease is more like renting. You make monthly payments to use the vehicle for a set time—usually a few years. But you don’t own it. At the end of the lease, you typically return the car unless you decide to buy it or start a new lease.
Chapter 7 Bankruptcy and Your Car Lease: What Are Your Choices?
If you file for Chapter 7 bankruptcy, you generally have two choices about your car lease: you can either keep the lease (called “assuming” the lease) or end it (called “rejecting” the lease). Here’s how each option works.
Option 1: Assuming the Lease
If you want to keep your car lease and you’re up to date on payments, you can choose to “assume” the lease. This means you agree to keep following the lease terms, making your monthly payments as usual.
· Benefits of Assuming the Lease:
- Lower Transportation Costs: If your lease payments are manageable, sticking with your current lease can be a budget-friendly option. You avoid having to look for new financing, which might come with high interest rates.
- A Path to Ownership: If you’re thinking about buying the car when the lease is up, assuming the lease allows you to continue toward that goal.
· Risks of Assuming the Lease:
- Ongoing Responsibility: By keeping the lease, you’ll still be responsible for the payments even after your bankruptcy case ends. If you fall behind, the leasing company could repossess the car.
- Potential Fees: You’ll be on the hook for any extra fees for mileage or wear and tear at the end of the lease, which could add unexpected costs.
Option 2: Rejecting the Lease
If the car payments feel too high or you don’t want to keep the vehicle, you can choose to “reject” the lease. This means ending the lease and returning the car.
· Benefits of Rejecting the Lease:
- Avoid High Payments: If the lease payments are too much to handle, rejecting the lease can free up money for other essentials.
- No End-of-Lease Fees: By giving up the car, you can avoid fees for extra miles or wear and tear.
· Risks of Rejecting the Lease:
- Losing the Vehicle: If you rely on the car for commuting, giving it up could be inconvenient or even disrupt your routine.
- Challenges in Getting a Replacement: After bankruptcy, financing a new car can be harder, and any loans you do get might have higher interest rates.
Talk to a Bankruptcy Attorney
Navigating car leases during Chapter 7 bankruptcy can feel complicated, but an experienced bankruptcy attorney can help. They’ll explain the pros and cons of each choice and guide you toward the option that best fits your financial situation.
At Brock and Stout, we’re dedicated to helping clients find solutions that bring them closer to a fresh financial start. If you’re facing financial stress, reach out to us for a free consultation. Let us help you take the first steps toward a better financial future.