The Surprising Benefits: Escape from Your Vehicle Lease in Bankruptcy
Oct. 8, 2018
Leasing a vehicle is tempting because it seems to be the less expensive way to go. But it’s often MORE expensive. Escape through bankruptcy.
The Temptation of A Vehicle Lease
Leasing can seem like a sensible way to get a new vehicle. You often pay less money down and pay lower monthly payments. So leasing can sometimes be a way to get reliable transportation for less money. At least in the short term.
The Hidden Economic Costs
But there are hidden costs.
First, at the end of your lease term you own nothing. Your payments don’t create any ownership. They give you nothing more than immediate possession.
At the end of the lease you don’t have a free and clear vehicle as you do after paying off a vehicle loan. You don’t have a vehicle free of monthly payment for a few years after pay-off. Instead of a free and clear vehicle at the end of the contract you’re stuck with figuring out how you can afford another vehicle.
Second, at the end of the lease you have no used vehicle to trade in for your next vehicle. Most likely you haven’t saved up money for a down payment. You haven’t used the lower monthly lease payments to save money for a down payment on your next vehicle. So getting into another leased vehicle may be your only viable option. You end up in a cycle of never really owning a vehicle, trapped into forever making vehicle payments.
The Hidden Economic Risks
Third, you’re hit with big financial penalties if you end up driving the vehicle more than the contract allows. You could also owe money if you have excessive wear and tear on the vehicle’s interior or exterior. You may also be penalized if the vehicle ends up having depreciated more than the leasing company figured it would as of the start of the lease contract.
Fourth, it’s usually harder to get out of a vehicle lease than a vehicle loan. With a loan it’s more likely that you’d build up some equity sooner. So you could sell the vehicle and pay off the loan. In contrast, getting out of a vehicle lease before its term is up is usually expensive. It can cost you thousands of dollars. The amount you would owe would depend on the vehicle’s “realized value.” That’s the relatively low amount the lease company would get from selling the vehicle at an auto auction. That amount isn’t even knowable until you want to get out of the lease so your big exit fee could come as a rude surprise.
As a result of these hidden costs and risks, leasing is usually the most expensive way to have access to a vehicle:
you have the car during the period of its greatest depreciation
at the end of the lease you have to return it because you’ve not built any ownership in it
when you return it you potentially pay extra to do so
then you repeat all this with another lease, continuously making payments
so you never to own a vehicle free and clear
Discharging Lease Debts Through Chapter 7 Bankruptcy
“Discharge” is the legal write-off of a debt in bankruptcy. (See Section 524 of the U.S. Bankruptcy Code about the “Effect of discharge.”) Under Chapter 7 debts get discharged within about four months of when you and your bankruptcy lawyer file your case.
Vehicle lease obligations almost always get discharged in bankruptcy. There are certain other types of debts that are never discharged; others in which a creditor can challenge the discharge. But these exceptions don’t usually apply to vehicle leases.
Discharge Early Termination or End-Of-Lease Charges
Chapter 7 bankruptcy allows you to escape the lease early. Your circumstances may have changed so that you can no longer afford the monthly lease payments. Or maybe you’ve already even fallen behind on those payments. Or you may just not longer need or want the vehicle. You may simply need the money for more crucial expenses.
Or, instead of trying to get out of the lease early, you may just be getting towards the end of your lease. Because of high mileage or lots of wear and tear on the vehicle, you expect to owe money then.
So, Chapter 7 lets you get out of your vehicle lease at any point without paying anything more on it.