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The Extraordinary Tools of Bankruptcy: Getting Out of Your Vehicle Lease through Chapter 7

A vehicle lease can cost you less up front and monthly, but in fact is often the most expensive option. Bankruptcy is your escape clause.


This series about “extraordinary tools” has been about powerful ways that bankruptcy can undo or fix big problems that you got into earlier. Using bankruptcy to get out from a financially harmful car or truck lease is another example of this.

The Downsides of a Vehicle Lease

Leasing has become an attractive way to get a new vehicle for seemingly sensible reasons.  It often requires little or no money down and the monthly payments tend to be significantly less than with a vehicle loan.

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

First, there’s the biggest reality: at the end of the lease term you own exactly nothing. Instead of a free and clear vehicle that could very well serve you for several more years while free of monthly payments, you have nothing. Except you do have a need to replace the vehicle.

Second, because you have nothing at the end of a lease, you don’t have a used vehicle to use for your down payment. And the odds are that you haven’t used the lower monthly lease payments as a means to save money for a down payment on your next vehicle. So, a vehicle lease can all too easily lay this kind of trap for you down the line.

Third, if you end up driving the vehicle more than the contract allows—say, because you had to take a job that required commuting further than you had expected—you would be hit with very substantial penalties at the end of the lease. Same with 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 leasing company estimated at the beginning of the lease contract.

Fourth, 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 lease company would get from selling the vehicle at an auto auction, an amount that would not be known until the time you want to get out of the lease.

Simply put, leasing is usually the most expensive and risky way of having a car. Why? Because you have the car during the period of its greatest depreciation, then you have to surrender it, potentially paying extra to do so, only to repeat that with another lease, continuously making payments, never to own a vehicle free and clear. It’s a continuous uneconomical cycle.

The Chapter 7 “Straight Bankruptcy” Discharge

A discharge is a legal write-off of a debt in bankruptcy. In a Chapter 7 case your debts are usually discharged within about four months of when your case is first filed.

Although there are certain limited types of debts that either are never discharged or are subject to objection by the creditor, vehicle lease obligations can almost always be discharged. The only circumstance in which the discharge of such an obligation could be challenged by the creditor is in the unlikely event that the lease was entered into as a result of a major misrepresentation or fraud by the lessee.

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, and perhaps you’ve already even 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 approaching the end of your lease and, because of your high mileage or significant wear and tear on the vehicle, you expect to owe money at that time.

In these situations you can get out of your vehicle lease and almost always you would not have to pay anything to the lease creditor.

“Rejecting” the Lease

When your Chapter 7 bankruptcy is filed, you have the option to 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 discharging any of the lease’s financial obligations.

To reject the lease, you simply state your intention to do so within 30 days of the filing of your Chapter 7 case on a document called the “Individual Debtor’s Statement of Intention.” This tells your creditor that you want to terminate the vehicle lease.

At that point your creditor may file a motion asking the bankruptcy court for permission to take possession of the vehicle. Or the creditor may instead just wait for the case to be over to take possession. You won’t be legally liable for any further installment payments, early termination fees, or end-of-lease penalties such as those for high mileage or excessive wear and tear. Those obligations would all be discharged, along with all or most of your other debts.


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