Leasing a car is a different type of financial obligation than buying a car, even though the payments are similar. Leasing a car is like renting an apartment, where you have no expectation of ownership or equity in the car at the end of the lease. If you can't make your lease payments and your car is repossessed, you're still responsible for the full balance of the lease, although you can offer a settlement to the lease company.
Leasing vs. Buying
To determine a lease price, the dealer calculates the residual value of the car at the end of the lease term and subtracts it from the retail price of the car. Add in fees and divide that by the number of months in the lease, and you have your lease payment. The residual value is how much the car is estimated to be worth at the end of the lease, and it's usually significantly lower than the retail price. When the car is repossessed and sold at auction, the bank is looking to satisfy as much of the residual value as possible; the auction amount usually won't cover the residual value amount and the lease balance because the car has already lost value by being used. Conversely, when the bank repossesses a car you are making ownership payments on, the bank wants to auction the car for as much of your loan balance as possible.
Your leased car can be repossessed if you fall behind on your payments. You owe your lease payments just like you would owe payments if you were buying instead of leasing. A major difference, however, is what happens after the car is repossessed. If the bank sells the car at auction, you still owe the full amount of the lease balance, regardless of how much the car sold for. If you were buying instead of leasing, you would only owe the difference between what you owed and what the car sold for. For example, if you owed $10,000 and the car sold for $5,000, you'd still owe $5,000. In a lease situation, you'd owe the $10,000 even if the car sold for more than your lease balance.
After the car has been sold at auction, the amount of money you owe -- the lease balance -- is now an unsecured debt, meaning there's no collateral attached to the debt. Many banks will consider a settlement agreement because it's difficult to collect unsecured debt. You can hire an attorney, a debt settlement firm or try to negotiate the settlement yourself. Keep in mind that you must be able to make the monthly payments on the amount you settle for, so start by determining how much you can afford to pay and for what length of time you are willing to pay. Start with a low but reasonable settlement number, such as half the balance -- if you can afford to cover that much. You will have the payment without the car, meaning you'll likely have a new car payment in addition to the settlement payment. Don't rope yourself into a high settlement payment if you know you can't afford it.
When you start falling behind on the payments, try to settle the matter before the car is repossessed. Ask the bank to consider a lease transfer, where another person takes over the lease payments and terms. The new person must meet the bank's credit qualifications, then you are relieved of responsibility for the car. Not all banks allow lease transfers, but it's one way to keep yourself out of a negative credit situation and keep the bank out of a repossession and collection situation.
If the bank won't agree to a lease transfer settlement or to a lease balance settlement after a repossession, bankruptcy is an option to relieve you of the financial responsibility of the lease. Both Chapter 7 and Chapter 13 bankruptcy protect you from legal action by the bank. Chapter 7 wipes the slate clean, where you're no longer obligated to pay back any portion of the lease balance. In Chapter 13, the bank can petition the trustee as a unsecured creditor and receive a small portion of the lease balance from the monthly payments you make to the bankruptcy trustee. The trustee decides on the settlement amount for the lease's unsecured debt. The rest of the lease balance is written off by the bank as a loss.
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