The Difference between a True Lease and a Secured Purchase

 Posted on June 07, 2026 in Secured Debts

When you sign a lease agreement, you probably assume you're renting. But in bankruptcy, what a contract is called doesn't always match what it actually is. Some agreements labeled as "leases" are actually disguised purchase contracts, and that distinction changes how your bankruptcy case can handle the debt.

If you're thinking about filing for bankruptcy in Texas, a New Braunfels bankruptcy attorney can help. We can figure out whether your "lease" is really a lease or something else entirely, and how it fits into your broader bankruptcy case. 

What Is the Difference Between a True Lease and a Secured Purchase?

A true lease means you're paying for the right to use property for a set period of time. When the lease ends, you give the property back. A secured purchase, by contrast, means you're buying the property over time, and the seller holds a security interest until you've paid in full.

The distinction sounds simple, but these contracts are often set up to make things confusing for customers. When it comes to bankruptcy, courts don't just look at what the agreement is called but what the agreement actually does (Texas Bus. & Com. Code § 1.203).

Why the Label on the Contract Doesn't Control Lease vs. Secured Purchase

Bankruptcy courts across the country have consistently ruled that what matters is the true economic substance of a transaction. The label printed at the top of a document doesn't control the outcome. A contract called a "lease" can still be treated as a secured purchase if the terms reveal that's what it really is.

Two factors that courts generally set aside when making this determination are who holds the title to the property and whether the written agreement uses the word "lease," as both are too easy to manipulate to be reliable indicators.

Monthly Payment Calculation with Interest and Principal Points to Secured Transaction

One of the clearest signals is how the monthly payments are calculated. True lease payments are based on current consumption value, meaning the fair market rate for using the property during the lease period. If the payments are higher than that, the extra amount may reflect interest and principal on a purchase. This points toward a secured transaction rather than a true lease.

Texas Law and Federal Bankruptcy Law Work on True Leases vs. Secured Transactions 

Federal bankruptcy law governs what happens in a bankruptcy case. Under Article I, Section 8, Clause 4 of the U.S. Constitution, Congress has the authority to establish uniform bankruptcy laws. The Bankruptcy Code, at 11 U.S.C. § 365, dedicates significant attention to how unexpired leases are treated in bankruptcy. However, the Bankruptcy Code doesn't generally define the word "lease." Whether a lease is really a security interest is determined under applicable non-bankruptcy law (11 U.S.C.). § 101(51)).

Because federal law is silent on the definition, bankruptcy courts turn to state law to fill in the gap.

Texas and the Uniform Commercial Code

Texas, like nearly every other state, has adopted the Uniform Commercial Code. The UCC provides that whether a transaction creates a lease or a secured purchase is determined by the facts of each case. As mentioned earlier, Texas bankruptcy courts applying the UCC look at the economic reality of the deal, not the paperwork's surface language.

Secured Transactions vs. True Leases in Chapter 13 and Chapter 7 Bankruptcy

If your agreement is a true lease, your options in bankruptcy are limited. You either assume the lease and keep paying under all of its original terms, or you reject the lease and surrender the property.

Chapter 7

In a Chapter 7 bankruptcy, you are either liquidating your debts or walking away from property you can no longer afford. If your agreement is a true lease, you must decide quickly whether to assume it or reject it. Assuming the lease means you keep the property and continue paying under the original terms. Rejecting it means you surrender the property and the remaining obligation is treated as an unsecured debt, which is typically discharged.

Chapter 13

Chapter 13 is where the distinction between a true lease and a secured purchase matters most. If your agreement is a true lease, your options are the same as in Chapter 7 — assume it or reject it — with no room to modify the underlying terms.

But if the agreement is actually a secured purchase, Chapter 13 opens up an option called a "cramdown." A cramdown allows you to keep the property while paying only what it is currently worth, not the full remaining balance on the original contract. 

The difference between the property's current value and the remaining balance is reclassified as unsecured debt, which is often discharged at the end of your plan. For property that has depreciated significantly — think furniture from a rent-to-own agreement or equipment bought under a disguised financing arrangement — the savings over a three- to five-year repayment plan can be substantial.

Call a New Braunfels Bankruptcy Lawyer Today

At the Law Offices of Chance M. McGhee, we understand how confusing these distinctions can be when you're already dealing with financial stress. Attorney Chance McGhee has over 20 years of experience helping clients in Texas work through bankruptcy. He's also a current Director of the San Antonio Bankruptcy Bar Association and stays up-to-date on changing bankruptcy laws, both federal and state. 

When you work with us, we'll review your agreements, explain how Texas law applies to your situation, and help you understand every option available to you. Call our Boerne bankruptcy attorney today at 210-342-3400 to schedule your consultation.