Redemption is a process available in Chapter 7 bankruptcy that allows you to regain control over important property. In this article, we’ll look at how redemption works and its implications for your financial future.
To learn more about redemption in bankruptcy, call Stone Rose Law at (480) 739-2448 to speak with an Arizona bankruptcy attorney.
Redemption is where you will pay a secured creditor what the collateral (e.g., your car) is worth instead of the actual loan balance. It is only available in Chapter 7 bankruptcy.
When you file your petition for Chapter 7 bankruptcy, you will need to identify with the bankruptcy court those property items you choose to give up for sale by the trustee, any items you intend to reaffirm with creditors, and items you intend to redeem.
Property you can redeem includes any kind of household property, including an automobile, but it does not include real property or a mortgage.
To redeem an item of personal property, you need to file a motion to redeem with the bankruptcy court. If the creditor objects to your motion to redeem, then the court will hold a trial on the issue.
If you and the creditor agree on the motion, then you will also need to agree on the property’s actual market value.
Sometimes, this is easy to do. For a car’s market value, for example, the Kelley Blue Book is often an authoritative source to determine a car’s value.
If you and the creditor cannot agree on the actual value of the property, then the bankruptcy court will decide in a valuation hearing.
Once your motion to redeem is approved and the actual value of the property is set, you must pay the creditor for the property’s equitable value in cash. You cannot do this by monthly payments; payment must be in a lump sum. Once you do this, you can discharge as unsecured debt any balance you still owe under your old financing arrangement with the creditor.
For example, let’s say you are financing a car. When you file your bankruptcy petition, the vehicle’s market value is $12,000, but you still owe $18,000 to the lender on the car loan. Under redemption, you pay the creditor the actual value, $12,000, and the remaining $6,000 is dischargeable.
If you do not have a lump sum available to pay, there are organizations that offer redemption loans. Your attorney will coordinate with the redemption lender to approve this with the motion to redeem. These loans are considered new loans acquired after bankruptcy. They will help you rebuild credit, but making all payments on time is also important, or it will negatively impact your credit. The downside of these loans is the interest. When applying for these loans, the organization will compare your current loan to determine if the redemption is worth it.
The main advantage of redeeming an item of personal property comes from keeping possession of your property after bankruptcy while paying only for its equitable value and removing any lien on it. This cost-effective solution avoids the prospect of the creditor immediately repossessing the item once your bankruptcy case is closed.
Redemption is especially useful if you owe more than the property’s market value. Redemption can also be advantageous if you cannot otherwise use one of your Chapter 7 property exemptions to retain possession of the item.
For creditors, redemption can also be in their best interest compared to a trustee sale or repossession of the property, especially if the equitable value from redemption would likely be more than what the property item might fetch from a trustee sale.
Redemption may not always be easy because of the cash-up-front requirement for the property’s market value. Many people seek Chapter 7 bankruptcy protection because they do not have income or ready funds to make monthly payments, not to mention a lump sum payment. This is why, in most Chapter 7 bankruptcies, debtors do not take advantage of this particular form of debt relief.
In some cases, though, it may be possible to borrow money from people you know or even some lenders to provide the funds needed to cash out the lender’s equitable interest.
Also, not all creditors may be amenable to redemption by agreement, especially if no agreement on market value is possible, so it is not a guaranteed option, and it may be necessary to fight for it through litigation.
Chapter 7 bankruptcy also allows you to reaffirm a debt with a creditor instead of seeing the property sold off by the trustee.
Under a reaffirmation agreement, you agree to continue to repay the creditor for the personal property item. One advantage of such an agreement is that you may be able to renegotiate payment terms and interest rates.
To a creditor, reaffirmation may be an attractive option because repayment through a new financing arrangement can be preferable to receiving a lesser amount through a trustee sale, and the lender will still have a lien on the property under the reaffirmation agreement.
However, if you do not keep up your payments under the reaffirmation agreement, the lender has the option to repossess the property.
Redemption, on the other hand, gives the lender partial payment up front in exchange for losing its ability to collect on the remaining unsecured part of the original loan amount and giving up its lien.
At Stone Rose Law, our Arizona bankruptcy lawyers help our clients protect their assets and keep their property when filing for Chapter 7 bankruptcy. We provide customized bankruptcy solutions tailored to your individual needs and designed to help you protect your assets and keep your property.
To talk with an experienced Arizona bankruptcy lawyer about your bankruptcy remedies and how bankruptcy procedures work, including redemption, call us at (480) 739-2448 or use our contact form.
