This blog is in response to a question I received from a reader. She asks what happens to a leased car in bankruptcy? The reader doesn’t indicate whether she wants to keep the car or not, so I’ll talk about both situations.

Assuming you want to get rid of the car, you can. Chapter 7 will eliminate any remaining “deficiency” balance, or Chapter 13 will allow you to repay the deficiency balance at pennies on the dollar, depending on what you can afford. The finance company will get possession of the car, usually through a repossession, but you won’t be obligated to pay.

If you want to keep the car, this situation works like most any other secured debt situation. You must continue to make the payments. Technically, you wouldn’t “reaffirm” the debt, as you might with a financed vehicle. But, you would “assume” the lease through a lease assumption. A reaffirmation and a lease assumption work very much the same way. Typically when a vehicle is involved the debtor would assume the lease at the same terms she had before she filed.

The benefit of the bankruptcy in a situation where you wanted to get out from under the car loan is only apparent if you understand what happens if your car was repossessed and you were not filing for bankruptcy. In that situation, the finance company would repossess the car and eventually auction the car at the auto auction. Typically the finance company does not get enough money from the auction to pay off your loan. The proceeds it does get would go toward your contractual balance owed. The difference is called a “deficiency” and you would still be legally obligated to pay the creditor the deficiency balance.

Car repossessions are a very common event that may lead a person into bankruptcy. Think about it, you can’t afford to pay the car notes, that is why you are behind to begin with, so the finance company repossesses the car. You now don’t have transportation and then you get a double whammy because the finance company can still sue you for the deficiency balance!

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This entry was posted on Monday, August 15th, 2005 at 3:35 pm and is filed under Bankruptcy Blog. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.