§722 Redemption: Saving Thousands on Secured Assets.

by Bankruptcy Law Network (BLN)

April 6, 2008

Section 722 of the Bankruptcy Code codifies the power to redeem secured assets.  In layman’s terms, this means you can make a lump sum payment and pay off the entire balance for the fair market value of the asset.

Typically, this option is not always available for someone that just claimed bankruptcy. Afterall, who has all that money in cash to make the lump sum payment? Well, maybe you do after all!

The redemption can happen at any time while the Bankruptcy is pending. If the 99 Toyota Corolla that you are driving that you owe $8000 on is only worth $1200, and your payments are $300 per month, you could technically stop paying when your case is filed and redeem the vehicle 4 months later at discharge, using the $1,200.00 that you saved during the bankruptcy. Alternatively, maybe you can get a loan from a family member or friend.

Moreover, pay particular attention to the fair market value.  Technically, this area has changed under the new laws.  It used to be the standard that ‘black book’ or ‘auction values’ were the norm. Now its ‘retail value’.  But what is retail value?Well, retail value according to some cases is as follows:

The Code also provides that”replacement value” means “the price a retail merchant would charge for property of that kind considering the age and condition of the property,” and no deduction for costs of sale or marketing is included. Clearly, retail value is the measure for replacement value; however, the statute provides no guidance for arriving at the “retail value” other than the provision that age and condition of the property must be considered in the valuation process, and that no deduction for costs of sale or marketing is included. Courts that have addressed this issue to date arrive at results that depend on the overall record and the evidence presented by the parties. See, e.g., In re Eddins, 355 B.R. 849 (Bankr. W.D. Okla.2006)(N.A.D.A. retail value is the base point for determining §506(a) value in a chapter 13 cram-down); In re Coleman, 373 B.R. 907, 2007 Bankr. LEXIS 2807, 2007 WL 23763722 at *4 (Bankr. W.D. Mos., Aug. 2, 2007)(valuation is determined by starting with the N.A.D.A “retail value,” less the cost of putting the vehicle in “clean” condition as defined by N.A.D.A., less 5%; however, if this formula is not appropriate under the circumstances of a particular case, parties may submit further evidence of actual value); In re Mayland, 2006 Bankr. LEXIS 967, 2006 WL 1476927 at *2 (Bankr. M.D. N.C., May 26, 2006)(reliance upon pre-BAPCPA practice of beginning the calculation of replacement value as 90% of N.A.D.A. retail value, and under current § 506(a)(2), including adjustments for costs required to restore vehicle to saleable condition); In re Brown, 2006 Bankr. LEXIS 713, 2006 WL 3692069 (Bankr. D. S.C., April 24, 2006)(court [*15] relies upon appraiser’s report submitted by creditor rather than accepting debtor’s market report); In re Ortiz, 2007 Bankr. LEXIS 1286, 2007 WL 1176019 at *3 (Bankr. S. D. Fla. Feb. 27, 2007)(Court averaged the debtor’s expert’s $ 10,500 retail value with a value of $ 11,841.67, which was calculated by creditor’s expert as the N.A.D.A. value plus quotes from two dealers, divided by three, to arrive at a retail price of an identical car as $ 11,506.25, and then reducing the value by the amount of the actual cost of repairs to the vehicle); In re Clark (2007 Bankr. LEXIS 765, 2007 WL 671346 (Bankr. N.D. Ohio Feb. 27, 2007)(court determined that the replacement value of the vehicle based on retail price that a retail merchant would charge debtors to acquire it is the average of the debtors’ retail value and the creditor’s retail value, considering the evidentiary shortcomings of both parties).

But the reality of the situation is that creditors will typically not object to a lower value since its simply not cost effective, and the fact that the time value of money even makes the lower redemption payment amount still worth more than what they would get at auction if they do not agree with value anyways.

So what can be redeemed? Pretty much all personal property.  The most common examples of redemptions I have done recently are vehicles, motorcycles, and quads.  Its not uncommon to pick up a quad for $2000 where $8000 is owed, or motorcycle for $3000 where $9000 is owed!

So be sure and consult with your attorney over your redemption options under 11 USC 722! It may save you a ton of money!

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Last modified: October 18, 2010