What is a Redemption Under Chapter 7 Bankruptcy?
by BankruptcyMax on 12/05/19
A redemption is another option available under chapter 7 bankruptcy that allows you to reduce the amount owed on your vehicle or other asset that is acting as collateral for secured debt and still keep it. A redemption is only available if you owe more on the vehicle than what it is worth. When you redeem a vehicle, you are essentially signing a new contract that states that you will keep paying on the vehicle if the bank agrees to lower the amount that is owed on it.
For example, you might own a vehicle that is only worth $10,000, but you owe $15,000. Through a redemption, the bank will create new terms for your loan where you now only owe $10,000 when you begin making payments on the new loan.
When you file Chapter 7, you have at least three choices in how you deal with your car loan:
Surrender your car to the lender
Reaffirm the debt
Redeem it for its value
A redemption usually has a higher interest rate than your original loan, but because the amount is owed is less, it typically lowers your monthly payment and/or duration of your payments.
The disadvantage of the redemption is, like a reaffirmation, you lose your bankruptcy protection on the vehicle. If you were to give your vehicle back to the bank, you would still owe on the remaining balance. Not everyone will qualify for a redemption.
You will have to owe significantly more on the vehicle than what it is worth, and the bank will have to be amenable to completing a redemption through your bankruptcy.
How to Redeem a Car in Chapter 7
Determine how much your vehicle is worth. Two good places to look are NADA and Kelley Blue Book.
Compare the value of your car with the amount your lender says you owe. If the value is significantly lower, it might be worth your while to pay off the value or to apply for redemption financing.
Talk with your bankruptcy attorney about whether it is feasible for you to redeem your vehicle.
Once you’ve come to terms with the lender, your attorney will prepare and file with the court a Motion to Redeem.
The redemption must be approved by the bankruptcy judge, but depending on your local procedures, it may not ever be necessary for you to appear in court. Of course, your attorney will explain your court’s process in more detail.
Once the court approves the redemption, the new lender will pay the old lender (and will pay your attorney any agreed-upon fee for handling the redemption). The old lender will release the old lien, and you will now be liable to the new lender on your new loan.
For more information call our Michigan Bankruptcy Lawyer in Detroit at (248) 281-6299 or visit our website bankruptcyMax.com
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