When financial distress leads you to the precipice of bankruptcy, one of the immediate concerns that spring up is the fate of your financed or leased car. This is a particularly poignant question if the vehicle is integral to your daily activities, such as commuting to work. In Canada, the implications of filing for bankruptcy on your leased or financed car hinge on several factors, including your financial capacity to sustain the lease payments and your personal preferences.
Your Financed or Leased Car and Bankruptcy: The Basics
The general perception is that filing for bankruptcy or a consumer proposal in Canada automatically leads to the loss of your car. This, however, isn’t the case. If your vehicle is financed or leased, you can still retain it after filing for bankruptcy provided you maintain the monthly payments as stipulated in your contract.
The crucial point here is your commitment to fulfilling your obligations under the lease or loan agreement. If your payments lag, the lending or leasing company has the right to repossess the car. On the other hand, if you’re up-to-date with your payments, your creditor cannot demand the vehicle back merely because you’ve filed for personal bankruptcy.
Interestingly, even if your loan or lease contract contains a clause that allows your lender to demand full payment, terminate the lease, and reclaim the vehicle if you go bankrupt, this clause is null and void. This is due to the protections provided by the Bankruptcy & Insolvency Act, which prohibits secured creditors from seizing assets under a security agreement just because you filed for bankruptcy. There are, however, a few exceptions to this rule, which include situations where the vehicle was repossessed before filing for bankruptcy, or you willingly relinquish the car.
Understanding the Nature of a Vehicle Lease
A vehicle lease constitutes a financial contract between you and the leasing company, wherein you agree to make fixed monthly payments over a defined period in return for the right to use the vehicle. Since the leasing company retains the ownership of the vehicle, the lease essentially represents a debt equivalent to the remaining payments.
When filing for bankruptcy, it’s mandatory to enlist all your debts, including a vehicle lease. In Canada, debts generally fall under two classifications: unsecured and secured. Unsecured debts encompass credit cards, payday loans, and lines of credit, while secured debts are tied to an asset, such as vehicle loans and mortgages.
In the case of a vehicle lease, it’s classified as a secured debt since the leasing company has a vested interest in the vehicle as collateral. Although this debt appears as a secured debt on your Statement of Affairs, it isn’t dischargeable by bankruptcy.
Is Breaking a Vehicle Lease or Loan in Bankruptcy Possible?
Though you’re legally allowed to keep your vehicle after filing for bankruptcy in Canada, it might not always be a financially prudent strategy. A hefty car lease payment could be a significant factor contributing to your debt issues, particularly when combined with other driving-related expenses like gas, insurance, and repairs.
If you’re contemplating bankruptcy, you have the option to voluntarily surrender your vehicle, terminate the lease, and absolve yourself of any future payment obligations. This might make sense in several scenarios such as:
- If the monthly payments have become unaffordable.
- If the vehicle’s value is less than what you owe. This is a common scenario for many Canadians due to longer-term vehicle financing.
- If the vehicle is no longer required. For instance, the shift to remote working during the COVID-19 pandemic has led many city dwellers to reconsider the necessity of owning a car.
To break away from an auto loan or lease before filing for bankruptcy, you simply return the vehicle to the leasing company. The company then takes on the responsibility of selling or auctioning the vehicle at its fair market value. If there are any outstanding lease payments above the sales proceeds, they become an unsecured debt that can be discharged through bankruptcy.
Assessing the Pros and Cons of Retaining Your Financed Car During Bankruptcy
While the option to keep your car after declaring bankruptcy is appealing, it isn’t always the most financially optimal choice. Often, individuals develop a strong emotional connection with their vehicles, which can cloud their judgment when making financial decisions.
However, if you’re grappling with financial issues and seeking ways to trim your monthly expenses, it’s worth considering whether retaining your car is truly beneficial. Remember, the purpose of filing for bankruptcy or a consumer proposal is to escape the clutches of overwhelming debt. Keeping your monthly car payment could potentially hinder your fresh start.
For those who can manage with public transportation, surrendering the car could result in substantial savings. The associated costs of insurance, gas, parking, maintenance, and repairs can quickly add up. You could always rely on rental cars for those occasional times when you need a vehicle.
If forgoing a car altogether isn’t feasible, consider replacing your current vehicle with a more affordable one to reduce your monthly costs. It’s advisable to do this before filing for bankruptcy as qualifying for a car loan during bankruptcy can be challenging. Furthermore, lenders specializing in bad credit car loans often charge exorbitant interest rates.
The Implications of Filing a Consumer Proposal on Your Financed or Leased Car
If you opt for a consumer proposal instead of bankruptcy, the terms regarding your financed or leased car remain largely the same. A consumer proposal involves a settlement with your creditors to repay a portion of what you owe, and you get to keep all your assets, including your home and vehicle.
Your vehicle lease remains unaffected when filing a consumer proposal. As long as you’re able to maintain your monthly payments, you can continue with your car lease. If you wish to separate from your financed vehicle, the process in a consumer proposal mirrors that in a bankruptcy filing.
The Bottom Line
As we can see, the decision to keep or surrender your leased vehicle when contemplating bankruptcy or a consumer proposal in Canada is largely in your hands. It’s important to thoroughly evaluate your financial situation and make an informed decision. If you’re unsure, consult your Licensed Insolvency Trustee who can provide valuable guidance to help you make the right financial decision. The key takeaway here is that understanding what happens to a financed or leased car in bankruptcy can help you navigate this challenging financial terrain with greater confidence.
