10 Oct Asset Values and Bankruptcy, Part 2
Ordinarily you use liquidation/tag sale/auction/pawn shop values when listing your property in the bankruptcy forms. (See Asset Values and Bankruptcy, Part 1.) There are two exceptions, both applicable when you are doing some damage to your secured creditors.
You can “redeem” collateral in Chapter 7, including a car, by paying its “replacement value.” Replacement value is defined as what a retail merchant would charge for the used collateral. The balance of the debt is discharged, just like credit card debt. Your attorney can guide you to a reputable lender for financing this redemption if you do not have your own resources (friends, family, retirement funds, or cash value life insurance), and can help you determine if the proposed redemption financing terms are better or worse than your current loan.
The second exception to using liquidation value is when you want to “bifurcate” your secured loan in a Chapter 13 filing into two parts, a secured portion paid in full with interest and an unsecured portion paid at the same dividend rate as your credit cards and other unsecured debt. This is also called lienstripping. Interest will be at the prime rate with a possible upward adjustment, depending on your jurisdiction. Again, you will use replacement value. Your attorney can advise you about the current status of decisions on limitations to the use of bifurcation (sometimes called the 910 Day Rule or the Hanging Paragraph) and exceptions to those limitations such as those discussed earlier by my colleague Chip Parker and myself, Jed Berliner.
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