Are you planning on declaring bankruptcy? While you may know how secured debts are treated during bankruptcy, do you know how a leased car would be treated? Is a leased car an asset or a debt when you file for bankruptcy?
Before filing for bankruptcy, it’s important to understand what is exempt, how much it will affect your credit and more. Find out how certain types of debts such as leased cars are actually dealt with during a bankruptcy.
Is A Leased Car Considered An Asset During Bankruptcy?
Yes, leased cars are considered an asset during bankruptcy. As such, a lease car will be considered as a secured debt as the debt is tied to an actual asset. Most secured debts aren’t considered during bankruptcy. As a result, your leased car is not dealt with during bankruptcy.
What Kind Of Debts Is Considered During Bankruptcy?
In Canada, you can be absolved of most unsecured debts when you file for bankruptcy. Secured debts are not considered during bankruptcy.
- Unsecured debts include personal loans, credit cards, payday loans and lines of credit. They’re unsecured because they aren’t tied to any assets (a.k.a. collateral).
- Secured debts include mortgages and car loans. They are secured because they’re collateralized by assets, which the lender is legally allowed to seize and sell if default on your payments.
What Will Happen To My Leased Car If I File for Bankruptcy?
Due to the nature of a lease, the leasing company has the right to take your vehicle away from you if you don’t make the required payments. However, if you maintain the payments, they cannot cancel your lease, even if you declare bankruptcy.
What If Your Car Leasing Company Tries To Cancel Your Lease?
If they try to cancel your lease or threaten to do so, contact your licensed insolvency trustee (LIT). Your trustee will be able to investigate the matter further.
If they had no right to take the car, they will be told to return it. If they don’t, you can legally sue them for a breach of contract. However, if it goes to that stage, you will need a lawyer, as an LIT can’t help you with that.
Note. Sometimes a leasing company will contain a clause that says if you go through bankruptcy, they can terminate the lease and take the vehicle. As such, it is incredibly important to review all the details of your lease with an expert.
What If You Want To Break Your Car Lease?
If you want to get rid of your leased car all you have to do is simply return the car to the leasing company before you file for bankruptcy. This is called a voluntary surrender. Doing this will help you avoid any towing costs or penalties for missed payments.
Once you voluntarily surrender the car, the company will try to sell the car to recoup payment. If they are unable to recover all of your outstanding debt through the sale, they may pursue you for the rest. Thankfully, if you file for bankruptcy after surrendering the car, any outstanding debt will be considered unsecured and may be absolved.
You should contact the leasing company beforehand to ask them where to take the car and/or what to do with it.
Note: it is very important that you keep insurance on the vehicle until the leasing company takes possession of it. If something happens to the car when you still have it, and you have already cancelled the insurance, it will make things much more complicated. In fact, this could potentially leave you still having to pay for the car.
Benefits Of Breaking Your Leased Car Contract During A Bankruptcy
Breaking a car lease isn’t an easy choice due to consequences like penalties for ending your contract early. Then again, breaking your lease can save you a lot of money in gas, insurance, and repairs. Luckily, terminating your car lease and payment obligations is possible during bankruptcy (although you should always try to do this beforehand).
Here are some major benefits of breaking your leased car contract during a bankruptcy:
- You Can Save More Money. As mentioned, giving up your leased car can be a huge money-saver in the long run. Not only will you be relieved from the costs of keeping your car on the road, you won’t have to make any more lease payments, which probably aren’t even affordable if you’re filing for bankruptcy. The interest and fees alone can be so pricey that leasing just isn’t the right option anymore.
- Your Car May Be Worth Less Than Any Payments Owed. You can walk away from a lease by returning the car to the leasing company, which will sell or auction it to get its fair market value. Any payments left owing then become an unsecured debt that can be discharged in bankruptcy. While there may be fees involved, this is especially helpful if your vehicle is worth less than your lease payments.
What Will Happen To A Leased Car In A Consumer Proposal?
A consumer proposal is another legal debt management process, only it allows you to keep your assets and pay back a portion of the money you owe. That means you get to hold onto your leased car if you don’t wish to break your contract. The same applies to cars that are financed by loans, which can be surrendered in a consumer proposal too.
Should I Keep My Leased Car During Bankruptcy or Not?
Now that you know that you can technically keep your lease vehicle during bankruptcy, but can also give it back, the question now is; which should you do?
This will depend on your unique life situation. If your expenses every month are too high for you, giving up the car will likely save you a decent amount of money. Not only on the lease payment but also on insurance, gas, maintenance and more.
However, if you really need a vehicle for one reason or another, it might make sense to keep the car and continue making payments, or simply find a cheaper car instead.
The rules regarding bankruptcy can differ slightly from province to province, so it is a good idea to reach out to a Licensed Insolvency Trustee or another expert in your area to see what the best course of action is to take. But ultimately, the choice is yours.
If your debts are too much for you to handle, be sure to speak to a licensed insolvency trustee to learn about your options.