What is the Difference Between a Car Lease and Car Loan in a Consumer Proposal/Bankruptcy?

April 25, 2019

If you’re considering filing for Bankruptcy or for a Consumer Proposal, you might be wondering about what will happen to your car.

The answer depends on what type of vehicle agreement you have — a car lease, or a car loan.

Car Lease

A car lease works a little like renting an apartment, but for a vehicle. When you lease a vehicle, you enter into the agreement with the lender to rent the car for a period of time. The lessor owns the vehicle and will register a lien against your name for the value of the vehicle.

Options in a Consumer Proposal or Bankruptcy

Prior to filing you have the option of surrendering the leased vehicle and including the car lease debt in a Consumer Proposal or Bankruptcy. If you wish to keep your vehicle you may be able to do so, provided you have been keeping up with the payments and can do so after filing.

However, if you have missed a payment (or payments) the car lender may end the lease and take the vehicle back.

Even if you have been keeping up with the lease, it’s possible that the lessor has a clause in the contract stating that should you claim insolvency, they can take the car back. However, if you have been keeping up with payments it’s very unlikely they will enforce this clause.

It’s worth considering in either case whether you can continue to afford the vehicle you’re leasing. If the payments are taking up a big chunk of your budget and making it harder to meet other obligations, you may want to trade it in for a less expensive option.

Car Loan

A car loan is different from a car lease, in that you own the vehicle, however the vehicle lender will register a lien against you for the value of the vehicle while you are making payments to pay off the car loan.

Options in a Consumer Proposal or Bankruptcy

You could either surrender the vehicle prior to filing a Consumer Proposal or Bankruptcy, or with the vehicle lender or the lien holder’s approval, you may have the option to keep the vehicle and continue making the same monthly payments until it’s paid off.

If you choose to keep the vehicle and the value of the vehicle is less than the amount of the unpaid vehicle loan there will be no impact. However, if the value of the vehicle is greater than the unpaid vehicle loan, then depending on the amount of the difference (depends on the exemptions in the province you live), you may have to pay some the difference to your creditors in a Bankruptcy or as part of your payments in a Consumer Proposal.

At Fuller Financial Solutions, we can evaluate the unique circumstances of your car ownership and explain what will happen should you decide to file for a Consumer Proposal or for Bankruptcy. We will also go over other debt management solutions to make sure you have considered all options.