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What Happens to Your Car Lease in Bankruptcy? 4 Options


Lawyer to Help with My Car Lease in Bankruptcy

So you’ve decided you need to file bankruptcy and you happen to be leasing a car. This article will go over your four options concerning the disposition of your car lease.

Bankruptcy law is nuanced in that it varies state-to-state. This article will give you a broad outline of your rights and responsibilities if you have a car lease, and you file bankruptcy. However, the law and facts of your particular situation should be reviewed by an experienced bankruptcy attorney so that you can be sure you are going to get the outcome you intend.

If you are in need of a bankruptcy lawyer in Philadelphia or the surrounding areas, give us a call at (215) 625-9600. We have helped thousands of people just like you straighten out their finances. We will discuss all of your available options during your free, no-obligation consultation, and help you decide what course of action is best for you.

Option #1 – You can no longer afford the lease and want to surrender your car

Unfortunately, this is all too common. A while ago, you were making good money and leased a car you thought you could afford. Now your hours have been cut, or you are on unemployment, and the lease payment is just too much.

What is “Surrender” in Chapter 7 Bankruptcy?

If you file a Chapter 7 petition, you can “surrender” the car to the lessor and have the remainder of the lease discharged as unsecured debt. This means you give the car up and walk away with no debt under the lease. Also, you can get your other unsecured debt, such as credit card debt or medical debt, discharged at the same time.

What will Filing Chapter 7 Bankruptcy Do to My Credit?

While the fact that you filed a bankruptcy petition can remain on your credit report up to ten years, most Chapter 7 debtors find that their credit score rises shortly after their bankruptcy case closes because their debt-to-income ratio has improved. Also, while there are credit ramifications to filing a bankruptcy petition, defaulting on your lease and forcing the lessor to repossess the car hurts your credit too. Which would you prefer?

Option #2 – You can afford your lease but only if you do not have to repay your unsecured debt

If unexpected expenses arise, such as uninsured or unreimbursed medical expenses, divorce, or job reduction or loss, you may be able to continue to pay your monthly car lease payments if you get those expenses discharged in bankruptcy.

What is “Assuming” a Lease in Chapter 7 Bankruptcy?

By filing Chapter 7, you can have credit card debt, medical expenses, and some income taxes discharged but keep your leased car by “assuming” the lease, meaning, you agree to the terms of the lease and continue paying, while the lessor’s rights are in no way affected by your bankruptcy filing.

Beware of Bankruptcy Fraud Regarding Car Leases

Keep in mind that if you leased a luxury vehicle shortly before filing bankruptcy expecting to keep that vehicle but to get out of paying your other creditors, that won’t work. Not only will the Trustee or your other creditors object to the discharge, but you may find that your Bankruptcy case winds up being dismissed for not being filed in good faith.

Chapter 7 is for the honest but unfortunate debtor who, through no fault of his or her own, is in financial distress. While you can’t expect to profit from bankruptcy by driving away from all of your unsecured debt in your luxury vehicle, you can expect help with unaffordable debt when you really need it, and be able to keep your car.

Option #3 – You are behind in paying lease payments but can afford to catch up now

If you’ve fallen behind in your lease payments, but your circumstances have changed and you could afford to repay the arrears if given the chance to do so over time, Chapter 13 is for you.

What Happens to a Car Lease in a Chapter 13?

Chapter 13 is a 3- to 5-year repayment plan where you pay the Trustee every month, and the Trustee in turn pays your lessor. At the end of your plan, your lease arrears are all paid up, and your unpaid unsecured debt is discharged.

You Can Catch Up On Many Kinds of Debt With Chapter 13

A Chapter 13 plan can also be used to pay mortgage arrears, past due child support or alimony, past due student loan payments, and past due government fines and fees that are not dischargeable.

You May Be Able to Pay Your Bankruptcy Attorney’s Fee Through Your Chapter 13 Plan

Chapter 13 is for those who have steady income, but perhaps you do not have enough in a lump sum to pay your filing fee and attorney fee. Don’t worry. You can still afford to retain an experienced Chapter 13 bankruptcy lawyer. We allow our clients to pay their attorney fee over time, through their Chapter 13 plan. Contact us to see how we can help you keep your car and repay whatever other arrears you have, over time.

Option #4 – You have reached the end of your lease, you want to keep the car, but you cannot afford to pay the entire balloon payment

Many leases conclude with a balloon payment, which is a payment you must make if you want to own the car after the lease term ends. While this is not often a good deal, if you are fond of the car and need it, in many cases you are able to pay that balloon payment over a 3- to 5-year Chapter 13 plan and own your car when the plan is complete. Again, your unsecured debt will be discharged as well.

If you think this may be a good option for you, when we meet for your consultation, we will discuss why you want to keep the car as well as it’s value now and projected value at the conclusion of the plan. It may be that once we crunch the numbers together you won’t want to keep the car past the end of the lease term, but know that you have a number of options when you file a Chapter 13 case.

Experienced Bankruptcy Attorney in Philadelphia will Help You With Your Car Lease in Bankruptcy

If you are worried about paying your car lease or about paying your other debt, let our bankruptcy attorneys help you. Contact us to schedule your free, no-obligation consultation with David M. Offen, Esq. When we meet, we will take a look at your entire financial situation and help you get the best possible result from your bankruptcy filing, including resolving your car lease problem. Let us help you get a fresh start.

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