Suppose that you are buried in credit card and medical bills, upside down on your car loan, and behind in your car payments. You have considered bankruptcy, but you don’t want to go through a three to five year Chapter 13 repayment plan, and you need to keep your car to get to work. What can you do?
There are many bankruptcy strategies to assist honest debtors obtain a fresh start. One tactic is found in section 722 of the Bankruptcy Code: Redemption. Redemption is only available to Chapter 7 filers. It allows the debtor to redeem secured collateral for an amount equal to the secured portion of the loan. In other words, if you have a car worth $7,500, and owe the lender $17,000, the secured portion of the loan is $7,500 and the unsecured portion is $9,500. You can redeem the car for $7,500 and the remaining $9,500 is subject to discharge at the end of your case.
The secured portion of property is determined by its “replacement value” – the price a retail merchant would charge for property of that kind, considering the age and condition of the property at the time you redeem it. If you and the lender disagree on the replacement value of the property, the court may hold a “valuation” hearing and decide the question for you.
The down side of redemption is that you must pay the secured portion to the lender immediately after the court approves your motion for redemption. Not surprisingly, several lending sources are available for financing a redemption. Your bankruptcy attorney is familiar with these lenders and can discuss options and terms with you. Once the redemption sum is paid, the lender no londer has a secured claim against the property.
Only property that meets the following qualifications can be redeemed in a Chapter 7 bankruptcy:
- The debt is a consumer debt, meaning the item is used for personal or household purposes. Business property cannot be redeemed.
- The debt is secured by personal property, not real estate.
- The property is tangible, not investments, stocks and bonds, and intellectual property rights.
- The property is exempt or the trustee has abandoned it because it has little or no equity.
Speak with an experienced bankruptcy attorney if you need to take advantage of the Bankruptcy Code’s redemption provision. In many cases redemption can save you thousands of dollars in debt and reduce your monthly loan payment.