Does Breaking a Lease Affect Your Credit?

One of the perks of renting is the flexibility of moving at the end of your lease. Even though you may intend on fulfilling the lease, life has a way of showing up at the most inopportune time. Whether it's illness, marriage, divorce, loss of employment, or accepting employment outside of the area, many situations may require you to break your lease.

Breaking a lease can be expensive and have serious implications. However, many people wonder whether breaking a lease affects their credit and if it can hurt their credit score. While it is true that breaking a lease can have an impact on your credit, causing potential harm, it's important to note that it doesn't have to be that way in all cases. Below we’ll explore the potential risks of breaking a lease early, and also some tips to avoid crashing your credit score as well as alternatives.

What Will Happen If I Decide to Break a Lease Early?

While many leases have standard language and terms, every lease can be different. Because of this, you should always refer to your lease to learn what the implications are should you break your lease early. It may even provide steps for doing so, such as:

• Paying an early lease termination fee
• Providing a specific amount of advance notice
• Relinquishing your security deposit
• Paying the remaining rent while the property is vacant
• Covering costs associated with searching for a new tenant

When the lease doesn't specify penalties, it may default to local and state laws. Fortunately, in most states, landlords are not allowed to haplessly wait for the term to end and sue you for any rent due after you've vacated the premises. Instead, in most states, landlords are required to take reasonable steps to re-rent your property. If this happens quickly, you may only be responsible for paying for a month or two of your rent. However, if the landlord can't find a tenant, you could be on the hook for rental payments for the remainder of the lease. There can be additional consequences if you do not pay the fees associated with terminating the lease, such as:

• The balance can be sent to collections. Many landlords utilize collection agencies to pursue unpaid rent and broken lease fees — just as lenders do on defaulted loans.
• You may have problems renting in the future. A potential, future landlord may check your rental history report or check with previous landlords to learn about you as a potential tenant. Broken leases and unpaid balances can make new landlords more reluctant to rent to you.
• Your landlord could sue you. A landlord lawsuit can result in additional court costs and civil judgments. If you're unable to pay, your wages could be garnered.

Does Breaking a Lease Hurt Your Credit

The steep costs of breaking a lease don't end with the three previously mentioned negative ramifications, it can also hurt your credit. For example, if you break a one-year lease in the 5th month, you may be required to pay rent until the property is rented. If this is the case and you don't pay rent, the landlord could send your account to a collection agency to recover the money.

While landlords may not report the unpaid rent to the credit bureau, most collection agencies report to one or all three nationwide credit bureaus (Equifax, Experian, and Transunion). When this happens, it can reduce your credit score. It can also remain on your credit report for up to seven years, causing devastating impacts, such as:

• Make it more difficult for you to secure a car loan and other types of loans
• Pay higher annual percentage rates on loans and higher fees
• Pay more for auto, renter's, and homeowner's insurance
• Possibly prevent you from certain types of employment
• Pay a higher deposit for utilities

How Can I Break My Lease Without Hurting My Credit?

Breaking your lease without impacting your credit requires precision and careful planning. Here are a few best practices to reduce the likelihood that a broken lease hurts your credit.

1. Read your lease. Thoroughly reading your rental property lease is crucial as it ensures a clear understanding of your rights, responsibilities, and potential limitations, empowering you to make informed decisions and avoid any future conflicts or misunderstandings with your landlord. Pay attention to all terms and information regarding breaking the lease and ask questions if you do not understand the verbiage.
2. Understand state laws. Research all state and local laws to understand how these rules may impact your situation. Some states offer legal justifications for breaking a lease, such as:
   1. When the landlord fails to maintain habitable and fit housing, this is also known as Constructive Eviction
   2. The leaseholder has been called up for active military duty
   3. When the landlord interferes with your right to enjoy the rental property, also known as a breach of quiet. This can include myriad landlord behaviors, such as permitting illegal activity on the property, entering the rental without adequate notice to the tenant, or ignoring complaints about other tenants' bad behavior.
   4. Other legal justifications for breaking a lease may include family health problems, domestic violence, and job relocation.
   5. Establish an open line of communication with the landlord. When moving, messages can easily get lost in translation, so it’s important to make sure all of your formal communications with your landlord are clearly written, concise, and well-documented, providing a solid foundation for effective communication, accurate record-keeping, and mutual understanding between you and your landlord. It can make conflict resolution easier and prevent the landlord from feeling the proverbial "high and dry" or being stuck with bad debt.
   6. Pay rental debts. The most important way to prevent a broken lease from hurting your credit is to pay all fees and debts.
   7. Keep receipts. Whether you pay $25.00 or $2,500, it's vital to keep receipts. By keeping accurate records, you can always recall any fees paid, which can help settle disputes quickly and cost-effectively.
   8. Get everything in writing and consider using a tenant surrender agreement. The days of handshake deals are over. Instead, get everything in writing. A tenant surrender agreement is a professional way to terminate your lease early and surrender the property to the landlord. Consider using this document to bolster your records.
   9. Get legal assistance. Sometimes the process of breaking a lease is complex. If you find your landlord especially difficult, consider seeking professional help. You may be able to find free or pro bono assistance options in your area.

   Alternatives to Breaking Your Lease

   The best way to ensure a broken lease doesn't negatively impact your credit is to fulfill the lease's terms. However, this may not always be an option. If breaking the lease appears to be the only way to navigate a situation, consider these alternatives:

   1. Sublet your lease. A sublet or sublease agreement is the process of adding someone else to your current lease. Similar to a lease, a sublease is a binding agreement that may allow you to move out without breaking the lease. Before subletting your place, make sure it's legal in your area and the landlord agrees to it. You should also ensure the subletter is reliable. Why? Because your name will still be on the lease. If they fail to fulfill the terms, you will still ultimately be responsible.
   2. Assign the lease. If subletting isn't suitable for your situation, you can research assigning the lease. With an assigned lease, you will transfer the entire lease agreement to a new party who will pay directly to the landlord. However, you may not be released from all liability associated with the lease.
   3. Help find a new tenant. Helping the landlord find a new tenant can help release you from the legal obligation of the lease. Consider using your social media profiles and other methods to communicate the availability of the apartment or home.

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