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One of the first questions that come to mind when you decide to file for bankruptcy is whether you can keep your car. It's possible to keep a leased car in bankruptcy as long as you're able to keep up with the monthly payments. That's because a lease is not considered debt in bankruptcy.
Bankruptcy is a legal process that helps people who are unable to pay their debts by eliminating or restructuring those debts. Before you proceed with bankruptcy, it's essential to understand the implications of a car lease in Chapter 7 or Chapter 13 bankruptcy and how it could impact you.
Can You Keep a Leased Car in Bankruptcy?
Car loans are secured debts, meaning the car serves as collateral. If you fail to make timely payments, your lender can legally repossess the vehicle to recoup their losses. However, when you sign a lease on a vehicle, you agree in the contract to return it to your creditor at the end of your lease period. As such, a lease is considered a contract—not a debt—in bankruptcy.
Consequently, you have two options with your leased car in a Chapter 7 or Chapter 13 bankruptcy: assume the lease, or surrender the vehicle. You must declare your intention to keep your car or surrender it to the court, the bankruptcy trustee and your creditor. It's wise to consult a bankruptcy attorney on how to proceed to avoid complications.
For example, with Chapter 7 bankruptcy, you should declare your intention on your Statement of Intention form, part of the bankruptcy paperwork initiating a Chapter 7 case. Remember, you must file the Statement of Intention within 30 days of filing for bankruptcy; otherwise, an automatic stay order forbidding a creditor from repossessing your car will lift, and you could lose your vehicle.
You may elect to keep your leased car, especially if the payments are low and you need it to get to work. Conversely, rejecting the lease and surrendering your car might be a good idea if the payments are expensive. By turning in the car, you could avoid standard lease charges for high mileage or physical damage.
When you initiate a bankruptcy, an injunction called an "automatic stay" goes into effect that essentially stops all collections, including any attempts by your lessor to repossess the vehicle. But if you owe back payments, the lender could sue you in court to lift the automatic stay, clearing the way for collection. If their legal efforts succeed, they may be able to repossess your vehicle.
Does the Type of Bankruptcy Matter?
While both Chapter 7 and Chapter 13 provide the option to keep or surrender your leased vehicle, each can impact your financial situation differently. Consider the following breakdown of your options with each type of bankruptcy.
In a Chapter 7 bankruptcy, you must complete a Statement of Intention informing the leasing company of your intention with the lease, either to "assume" (continue) your lease or "reject" (discontinue) your lease. Here are some key conditions affecting your lease in a Chapter 7 bankruptcy.
- You have 30 days to file your Statement of Intention. Otherwise, the bankruptcy's automatic stay could lift, and your lessor can repossess your car.
- Generally, your payments must be current to assume the lease. If you can't catch up on your payments, you can return the car to your lender without obligation to pay according to the terms of the lease agreement.
- Depending on your lease agreement and how many back payments you owe, the lender may not be obligated to assume the lease if you default.
- If you reject the lease on your Statement of Intention, you'll have to surrender the car, but you'll no longer owe payments on the vehicle.
A Chapter 13 bankruptcy usually offers more options, but the court aims to approve only those options that best serve your financial interests.
- A Chapter 13 bankruptcy initiates a repayment plan for you to repay some or all of your debts. If you're not current on your lease payments, you'll have to include the past-due balance in your three- to five-year repayment plan.
- The bankruptcy trustee can choose to assume or reject your lease and usually will only assume it if you benefit financially from doing so. If they assume the lease, you can continue leasing your car. If they reject it, the automatic stay is lifted.
- If you owe back payments on your lease, the lender will likely file a motion to end the automatic stay so they can repossess your car to collect the debt.
Can You Start a New Lease in Bankruptcy?
A bankruptcy will have serious ramifications for your credit. Remember, your payment history is the most important factor determining your credit score, and bankruptcy will severely harm your score for years. A Chapter 7 bankruptcy remains on your credit report for 10 years, while a Chapter 13 bankruptcy does so for seven years.
As a result, getting approved for many types of credit, including car loans and leases, will be more challenging. Although some lenders will lease a car soon after bankruptcy, you'll likely make higher payments than someone without a bankruptcy.
Consider these factors when deciding whether to keep your current lease. For example, if you depend on your car to get to work or if your existing lease payment is less than you might expect with a new lease, you might consider keeping your current car lease.
The Bottom Line
Because your financial situation is unique and bankruptcy courts have different requirements, it's essential to consult with a bankruptcy attorney before making important decisions. A reputable bankruptcy attorney can help you navigate the legal system, helping to protect your financial interests and pave the most effective path to regain your financial footing.
If you decide to declare bankruptcy, remember it's never too early to begin working to rebuild your credit. Follow a budget and pay your bills on time each month, as your payment history makes up 35% of your FICO® Score☉ , the score used by 90% of top lenders. Also, consider monitoring your credit to help you track your progress and spot potential issues that could further damage your credit score.