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Getting Out of Your Vehicle Lease through Chapter 7

A vehicle lease can cost you less up-front and each month, but is in reality very expensive. Bankruptcy is your way to break the contract.


The Big Disadvantages of Vehicle Leasing

Leasing has become an attractive way of getting into a new vehicle. The reasons seem sensible.  A vehicle lease often requires less money down, and the monthly payments are usually less than with a vehicle loan.

But like any deal that looks too good to be true, there’s a catch. In fact, there are several.

1. At the end of the lease term you own nothing. Pay off a vehicle loan and you have a free and clear vehicle for you to use for perhaps years more while not needing to make monthly payments. Instead, at the end of a lease you have nothing. And you have to figure out how to pay for another vehicle. So what seemed less inexpensive short-term ends up being more expensive long-term.

2. Because you have nothing at the end of a lease, you don’t have a used vehicle to use for part or all of a down payment. There’s a good chance that you haven’t used the lower monthly lease payments to save money for a cash down payment on your next vehicle. So you may well be induced to get into another vehicle lease, the continuation of an expensive cycle.  

3. If you end up driving the vehicle more than the contract allows you would be hit with very substantial penalties at the end of the lease. This can also happen if you have excessive wear and tear, on either the interior or exterior. You may even have to pay extra if the vehicle ends up having depreciated more than the lease creditor (the “lessor”) estimated at the beginning of the lease contract.

4. Getting out of the lease before the end of the lease term is usually tremendously expensive—often costing you several thousands of dollars. The amount you would owe would be based on the “realized value,” the relatively low amount the lessor would get from selling the vehicle at an auto auction, an amount that would not be known after you surrendered the vehicle.

The reality is that leasing is usually the most expensive and risky way of “owning” a car or truck. That’s because you have possession of the car while it’s depreciating the most. Then you have to surrender it, and potentially even have to pay extra to just to get out of the lease. Then, without a trade-in vehicle, this is repeated with the next lease, so that you are continuously making payments, never to own a vehicle free and clear. It’s a continuous expensive cycle.

The Chapter 7 Discharge of Debts

A Chapter 7 “straight bankruptcy” can be your way out of this cycle.

“Discharge” is the legal write-off of a debt in bankruptcy. In a Chapter 7 case your debts are usually discharged within about four months of the filing of your case.

Vehicle lease obligations that you want to escape can almost always be discharged under Chapter 7. There are certain limited types of debts that are never discharged—such as unpaid child or spousal support. The discharge of other types of debts could be challenged by the creditor—such as debts incurred through fraud. So 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.

Discharge Early Termination or End-of-Lease Charges

You may need to escape the lease early because your circumstances have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve fallen behind on those payments. Or you may simply not need the vehicle any longer and need your money for more crucial expenses.

Or you may be at the end of your lease and owe for high mileage or excessive wear and tear on the vehicle.

In all these situations you can get out of your vehicle lease and not have to pay anything to the lessor.

“Rejecting” the Lease

When your Chapter 7 bankruptcy is filed, you have the option of either “assuming” or “rejecting” the vehicle lease. “Assuming” the lease means keeping the vehicle (if the lessor allows this) and being bound by all the terms of the lease. “Rejecting” the lease means surrendering the vehicle and discharging all of the lease’s financial obligations.

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.” This is sent to your lessor formally informing it that you want to terminate the vehicle lease.  

At the point when you “reject” your lease your lessor has the right to take back the vehicle. See Section 365(p)(1) of the U.S. Bankruptcy Code. So you or your attorney will usually make arrangements for that to happen in a way that is convenient for you.

Then you won’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.


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