After I File Bankruptcy, Can I Keep My Stuff? Part Four

20 Apr After I File Bankruptcy, Can I Keep My Stuff? Part Four

The Bankruptcy Code offers one final option to consider in dealing with liens on collateral the debtor wants to keep. The Code allows a debtor to “redeem” collateral, which means that the debtor pays the lienholder a one-time, lump sum payment equal to the value of the collateral, in full satisfaction of the debt. The idea is to put the lienholder in the same position as if the collateral had been surrendered and liquidated to pay the lien. Since that is its purpose, most courts allow redemption at liquidation values, rather than a higher replacement value.

The usefulness of the redemption provisions is somewhat limited by the requirement that the redemption be paid in a lump sum. Most bankrupt debtors don’t have piles of cash lying around with which to redeem property, and if they did, the Chapter 7 trustee would take it. One situation where redemption may be useful is when the collateral has little value, and the debt greatly exceeds the value of the collateral. For example, if the debtor financed the purchase of furniture at one of those places that requires no monthly payments for a months and months, the furniture may have very little value by the time the debtor begins to repay the loan. Where the collateral has depreciated to that extent, it may be possible for the debtor to redeem the collateral.

Redemption may also be an option to consider to allow a debtor to keep a vehicle, if the redemption amount can be financed. There are lenders who provide this type of financing, and although the interest rates are high, the option can make sense when the debtor’s car is worth significantly less than the amount of the lien on that car. (That may occur, for example, when the debtor trades a car that is upside down, and finances the difference.) The debtor may be able to finance the redemption of his vehicle (at liquidation value) instead of surrendering his existing vehicle, and then purchasing a replacement vehicle (at retail value) and paying the same hight interest rate.

Redemption may be useful and practical in the right circumstances. Your experienced bankruptcy attorney can help you determine whether it is right for you.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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