How Does Redemption Work in Chapter 7

What are your options in Chapter 7 if you own a vehicle that is worth thousands of dollars less than the debt on the vehicle - in other words, you are upside down on the vehicle.  Further, what if you are behind on your payments or you have a spotty payment history?

The Bankruptcy Code provides two options for a debtor who wants to keep secured collateral that is subject to an outside loan.  Option one is called “reaffirmation” and I discussed that process in a previous Bankruptcy Law Network blog post.  Option two is called “redemption” and I’ll discuss it here.

Section 722 of the Bankruptcy Code provides that a debtor can redeem secured collateral  for an amount equal to the secured portion of the loan.  In other words, if you have a vehicle worth $7,500 subject to a $17,000 loan, the secured portion of the loan is $7,500 and the unsecured portion is $9,500.   You can therefore redeem the vehicle for $7,500.

In order to redeem you and your lawyer have to file a Motion for Redemption of Collateral and you must be prepared to buy out the secured lender immediately.

Not surprisingly, there are several lending sources that have arisen to provide financing to debtors seeking to redeem collateral.  You and your lawyer should carefully examine the finance terms of redemption loans.  In some cases, you can save money but in other cases, the cost of a redemption loan might cancel out the savings you might see from a standard reaffirmation.