Are you struggling with debt and considering bankruptcy as a solution? If so, you may be concerned about the fate of your vehicle, especially one you’re leasing or have financed with a car loan.
So what happens to a leased or financed car if you file for bankruptcy? In short, you can keep your car provided you continue making the lease or loan payments. While there are certain assets you must give as part of your bankruptcy, your vehicle isn’t necessarily one of them.
In this article, we’ll explain how leased and financed vehicles are treated under bankruptcy so you can decide if this debt relief option is right for you.
Do you lose your car if you file for bankruptcy?
One of the prevalent myths about personal bankruptcy is that you lose everything you own. That is not true. There are certain assets that you’re allowed to keep during bankruptcy, known as exempt assets, including clothing, RRSP accounts, and most pension plans.
If you file for bankruptcy or a consumer proposal in Canada, you don’t automatically lose your car. You can retain ownership of one vehicle up to a certain net market value (the market value, less the value of any auto loans), which varies from province to province. As long as you maintain your loan payments, you don’t have to give up your vehicle.
For example, in Ontario, you can keep one car with a net market value up to $7,117. So, if you declare bankruptcy in the province and your car is worth $6,000 after deducting the value of the auto loan, it’s safe from the clutches of creditors.
But what if your car’s net market value is $8,000? In that case, you can pay out the excess amount of $883 ($8,000 – $7,117) to your Licensed Insolvency Trustee (LIT). This money will go toward your bankruptcy estate, with the proceeds distributed to your creditors. You’ll then be able to keep your vehicle, as long as you continue making your loan payments.
If you have a second vehicle, there is no exemption, and the full net market value would need to be paid to your estate in a bankruptcy.
But let’s say you drive a car that you lease. What happens then?
What happens to a leased or financed car in bankruptcy?
Both a car lease and a car loan are types of secured debts, which means there’s an asset (in this case, your vehicle) registered against them. And since bankruptcy in Canada deals exclusively with unsecured debts, it doesn’t impact leased or financed vehicles. So, legally, you can keep a car that you’re leasing or making loan payments on throughout bankruptcy, provided you are not behind in your payments at the date of filing and you continue making your payments.
Under a car lease, the vehicle you’re using is an asset of the leasing company that you make monthly payments under a fixed contract for the right to use. Should you fail to make your lease payments, they can seize the car, whether you file for bankruptcy or not. The same concept applies to a financed vehicle, your lender can legally repossess it if you fail to make the payments.
The provincial exemption doesn’t apply to leased cars because you don’t actually own the vehicle. So, you don’t have to worry about losing your vehicle after declaring bankruptcy, regardless of its market value. However, it may be advantageous to give up a leased or financed car once you do, depending on your financial circumstances. We’ll discuss this issue later in this article.
Can your leasing company cancel your lease when you file for bankruptcy?
If you’re leasing a vehicle, the leasing company cannot willfully cancel your lease when you file for bankruptcy. Some lessors will include a clause in the lease contract stating that they reserve the right to terminate the lease if you declare bankruptcy. They may do this to protect themselves against your defaulting on your payments.
However, the Bankruptcy & Insolvency Act (BIA) prohibits these types of clauses in debt agreements, including leases. Secured creditors cannot seize your car under a security agreement simply because you filed for bankruptcy or a consumer proposal unless:
- They repossessed the vehicle before your bankruptcy filing date
- They provided you with notice of the intent to repossess the car 10 days before you filed for bankruptcy
- You gave them permission to repossess the vehicle
As long as you continue making your lease payments during the bankruptcy process, you can maintain access to your car. Aside from the exceptions listed above, it’s against the law for your leasing company to cancel the lease because you’re insolvent.
Can your lender demand full payment of your car loan when you claim bankruptcy?
No. As with a lease, your lender cannot demand full repayment of your car loan if you declare bankruptcy. Provided you keep up with your loan payments during bankruptcy, you’re entitled to keep your car. You’re lender also cannot seize it to pay off the loan and claim they are doing it to “reduce their risk exposure.”
The Bankruptcy & Insolvency Act (BIA) prevents secured creditors from calling a loan to be repaid in full immediately because the debtor files for bankruptcy. The exceptions are the same as enumerated above.
Can you stop making your car lease or car loan payments under bankruptcy?
You can stop making your car lease or car loan payments at any time if you’re unable to afford them. Since these financial obligations are secured debts, it makes little difference whether you stop making payments before or after bankruptcy.
However, if you plan to go down this route, it’s easier and beneficial to do it before pursuing bankruptcy. Your Licensed Insolvency Trustee can advise you on your options, so make sure to disclose to them that you’re giving up your car.
Filing for bankruptcy can free up more of your budget, as it eliminates costly debts like credit cards and payday loans. However, you may still struggle to make your payments, in which case, walking away from your lease or car loan may make sense as any shortfall owing on the loan oe lease is a debt that can be included in your bankruptcy or consumer proposal. Of course, this means you will also lose access to the car, so be prepared for that.
Breaking a car lease
To break your vehicle lease, you would return your vehicle to the car leasing company. They will, in turn, sell it at its fair market value to recoup their loss. You’ll still take a financial hit, as you’ll be responsible for early lease termination fees. But you’ll save money in the long run. Additionally, any lease payments you owe after the sale proceeds become an unsecured debt. As a result, you can include them in your bankruptcy.
Breaking a car loan
To break a car loan, you would notify your lender that you can’t afford the monthly payments and will stop making them. Inform them that you wish to voluntarily surrender the vehicle. The lender will inform you of the location to drop off the car on an agreed-upon date. Alternatively, they may arrange for someone to collect it from your home.
From there, the lender will sell the vehicle and send you a statement confirming the sale and the money received. If the sale results in a shortfall and part of the loan remains unpaid, you can include this amount in your bankruptcy.
What happens to a leased or financed car in a consumer proposal?
A consumer proposal is a bankruptcy alternative in which you negotiate a settlement with your unsecured creditors to repay a portion of your debts. As with bankruptcy, leased and financed cars are not affected by a consumer proposal. So as long as you maintain your monthly payments, you’re free to keep your vehicle. In fact, you get to keep all of your assets, including your home, under a consumer proposal.
However, a consumer proposal is more expensive than bankruptcy, as you’re responsible for repaying some of the money you owe. You may consider surrendering your vehicle as part of your proposal to obtain more financial relief.
Is it worth keeping a financed or leased car during bankruptcy?
If you rely heavily on a car for commuting to work, managing personal errands, and other daily tasks, it’s worth keeping it.
However, owning a car can also strain your wallet. Insurance, gas, repairs, registration fees, and of course, monthly loan or lease payments are some of the costs you have to contend with. If you’re in dire financial straits, cutting these costs will lighten your budget and enable you to start anew. Giving up your car may be a wise move under these circumstances.
Instead of driving, you could use public transit, ridesharing, or renting a car to get around. You can also finance the purchase of a cheaper vehicle in the future once you complete bankruptcy and rebuild your credit.
However, if you urgently need a new car now, consider applying for a loan and purchasing it before declaring bankruptcy. The reason is that bankruptcy will severely damage your credit score—you’ll get an R9 rating on your credit report, the worst one you can get in Canada. As a result, you’ll only qualify for high-interest car loans, which can lead to further debt problems down the road.
The bottom line on leased and financed cars under bankruptcy
You can legally keep a financed or leased car during bankruptcy or a consumer proposal as long as you are not behind in payments and continue making your payments. Your vehicle leasing company or auto loan lender cannot cancel your contract or demand payment in full because you’re insolvent.
However, to achieve a fresh financial start, voluntarily giving up your car is something worth considering, especially if you’re on a low income. Crunch the numbers to determine if maintaining your lease or car loan payments is financially sensible. A Licensed Insolvency Trustee can help you make the best decision while helping you manage your unsecured debts.
Contact David Sklar & Associates today to learn whether personal bankruptcy or a consumer proposal can help you get out of debt for good. One meeting is all it takes to start the path toward a prosperous financial future.
