Dear Dr. Don,
Auto leasing through a bankruptcy
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?
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.
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
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