Escaping a Vehicle Lease in Chapter 7
Vehicle leases are often not such a good deal. If you find out your isn’t, you can almost certainly “reject” that lease and pay no more.
Our last two blog posts have been about how to keep your leased vehicle in a Chapter 7 or 13 bankruptcy case. But what if you don’t want to keep your lease? Vehicle leases are often not as good of a deal as you might have thought at the beginning. Bankruptcy gives you the rare and often valuable opportunity of getting out of your lease.
Today we talk about leaving your vehicle lease behind without owing anything on it through Chapter 7 “straight bankruptcy.” Our next blog post will be about how that works through Chapter 13 “adjustment of debts.”
Popular but Risky Vehicle Leases
We mentioned a couple blog posts ago that vehicle leases are getting more and more popular. In a recent 5-year span they increased from 17% to 27% of vehicle transactions. People clearly like the low money down and lower monthly payments that often come with leases.
But vehicle leases also often come with significant downsides.
1. Unlike a vehicle loan, at the end of the lease term you OWN nothing. Once you pay off a vehicle loan and you have a free and clear car or truck. With that as a goal it’s more likely you’ll take better care of your vehicle. So you’ll then likely have it for years more while you pay no monthly payments. Instead, at the end of a lease you return the vehicle and have nothing. What seemed less inexpensive short-term usually ends up being much more expensive long-term.
2. You own no vehicle at the end of the lease so there’s no trade-in vehicle for your next vehicle purchase. You’d usually have to come up with a cash down payment, making a purchase more challenging. It’s unlikely that you’ve saved the money from the lower monthly lease payments to put into your next vehicle. As a result you may be stuck with getting into another vehicle lease, continuing the expensive cycle.
3. If you put on more mileage than the contract allows you could owe substantial penalties at lease end. This can happen with more-than-normal interior or exterior wear and tear. Or you may have to pay extra if the vehicle simply depreciates more than the lessor anticipated.
4. Getting out of the lease before the end of the lease term is usually very expensive. It could easily cost several thousands of dollars. The amount you would owe would be based on the “realized value.” That’s the relatively low amount the lessor would get from selling the vehicle at an auto auction. The amount wouldn’t even be known until after you surrendered the vehicle.
Buying Your Leased Vehicle at the End of the Term
You might be able to finance the purchase of your leased vehicle at the end of the lease term. But you simply can’t count on it. You are stuck with the terms the creditor is willing to extend to you. If your credit isn’t the greatest, you could easily be denied. If you owe extra because of the contractual penalties referred to above, you’d be paying too much for that vehicle. Plus you’d be paying interest on that higher amount, further increasing your cost for the vehicle.
The Bottom Line
The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. You have possession of the car while it’s depreciating the most. Then you have to surrender it, potentially paying extra to just to get out of the lease. Then without a trade-in vehicle this is often repeated with the next lease. So you’re continuously making payments, never owning a vehicle outright. It’s a continuously expensive cycle.
The Chapter 7 Discharge Solution
A Chapter 7 “discharge” can write off almost all vehicle lease obligations. Except in the unlikely event that you got the lease by through a serious misrepresentation or fraud, you will get out of whatever you owe on the lease.
You may need to get out of the lease early because your circumstances have changed. You may no longer be able to afford the monthly lease payments. You may have fallen behind on those payments. You may just not need the vehicle any more or may need your money for more crucial expenses.
Or you may instead be at or near the end of your lease and owe or expect to owe high mileage or excessive wear and tear charges on the lease.
In all these situations you can get out of your vehicle lease and owe nothing to the lessor.
“Rejecting” the Lease
When your bankruptcy lawyer files your Chapter 7 case, you can either “assume” or “reject” the vehicle lease. “Assuming” the lease means keeping the vehicle and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and writing off all your financial obligations under the lease.
To “reject” the lease, you simply state your intention to do so when filing your Chapter 7 case, on a document called the “Statement of Intention for Individuals.” Your lessor then has the right to accept back the vehicle. (Section 365(p)(1) of the U.S. Bankruptcy Code.) So you or your lawyer would make arrangements to make the timing convenient for you.
Then you wouldn’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties. Those obligations would all be discharged, along with all or most of your other debts.