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  Ask Dr. Don By Don Taylor, Ph.D., CFA, Bankrate.com    

Auto leasing through a bankruptcy

Dear Dr. Don,
If I break my existing car lease while filing bankruptcy, will another dealership allow me to buy (finance) a new vehicle with them? Or would it be in my best interest to continue to pay on my current lease until it is complete and then buy another vehicle from the same dealer? Do dealerships look favorably on customers that pay on a lease through a bankruptcy, or does it really matter?
-- Lisa

Dear Lisa,
There's no such thing as a partial bankruptcy. You have to include all of your debts in the bankruptcy filing; you don't get to pick and choose. Debts that would normally be discharged in a bankruptcy can be reaffirmed, where you sign a reaffirmation agreement with a creditor that keeps the debt from being discharged. Reaffirmation seldom makes sense for unsecured debts, such as credit card debt.

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Breaking a lease is an expensive proposition, but you should be able to discharge the obligation as part of the bankruptcy filing. Consult with a bankruptcy attorney to find out if that's true in your state. If that's the case, breaking the lease as part of filing for bankruptcy is smarter than breaking the lease after the bankruptcy has been discharged. The downside is that you've also lost use of the car and diminished your chances of getting any firm to finance your next car.

The current lessor will be very happy that you are keeping up on the payments through a bankruptcy filing. That payment history, however, isn't guaranteed to generate willingness on the part of a new lender, or even the current lessor, to finance your next car.

An unblemished payment history after a bankruptcy discharge is the best way to start rebuilding your credit. Keeping up with your lease payments helps rebuild your credit. Still, the bankruptcy will make it harder for you to get approved the next time you want to finance (via lease or loan) a car and will increase your financing costs.

In general, it takes about two years from the date of a bankruptcy discharge before a lender is willing to extend you credit again. You didn't mention how much time was left on your existing lease, but a few months remaining actually gives you less flexibility than if two years remained. Breaking the lease and not being able to replace the car is untenable. Keeping the existing lease is the better solution.

Another possibility includes using Swapalease.com or LeaseTrading.com to get out from under your current lease and then financing a new car prior to filing for bankruptcy. If you're contemplating bankruptcy, however, then your credit history isn't likely to be very good and this solution won't be cheap.

-- Posted: August 5, 2004

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See Also
Keep the car in bankruptcy?
Holding on to an heirloom in a bankruptcy
Financial advice glossary
More Dr. Don stories

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