Bankruptcy Basics: What Is A Redemption?

by Karen Oakes, Esq.

September 16, 2007

A “redemption” is provided for under Section 722 of the Bankruptcy Code and is available for Chapter 7 debtors. That provision lets a debtor (in this case, only a live person, not a business or a corporation) to keep personal property (personal, family or household property) when that property has been used to secure a debt (like a car, jewelry, vacuum, furniture, etc. ). The debtor must pay the fair market value of the item to the creditor. That fair market value determines to what extent the creditor is secured. The second choice is to pay the amount of the secured creditor’s debt. The third choice is to enter into a reaffirmation agreement and become legally obligated on the debt again. The last choice is to surrender the item to the secured creditor.

Under Section 722, a debtor may be able to get the lien released for far less than what he owes. So, for example, if you owe a creditor $10,000 on a car and the fair market value of the car is $4000, the Bankruptcy Code allows you to say, ” I will pay you $4000 to redeem the car”. That amount must be paid in one lump sum to that creditor.

If the creditor agrees with the value, then somone has to submit a stipulated order of redemption. If the creditor does not agree with the value, then the debtor has to file a motion for redemption, and a hearing will be set with the judge deciding what the value of the item is. There are deadlines involved in the redemption process and sometimes there are local forms that are required.

The debtor has to have the money to redeem the item and be able to pay the creditor. Some debtors turn to companies that specialize in this kind of financing; others receive the money as gifts from family members or friends.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

Last modified: October 22, 2012