What is redemption? (Chapter 7 Bankruptcy)
Redemption is the ability to pay a secured creditor the value of the collateral rather than the amount of money that you owe to that creditor to allow you to keep the collateral. For example, if you have a car that is worth $5,000.00, but you owe $12,000.00 on the car, you may be eligible to redeem the car by paying the secured creditor $5,000.00. This is known as redemption and is authorized under Section 722 of the bankruptcy code.
Here is an example of how the redemption process would work:
1. You file Chapter 7 bankruptcy.
2. You have a car that you want to keep, but you are upside down on your car.
3. The secured lender for the car will want you to sign a reaffirmation agreement for the car. Under this hypothetical, your car is only worth $5,000.00, but they would want you to sign a reaffirmation agreement for the full amount of money that you owe, which is $12,000.00.
4. You decide that you want to keep your car, but you do not want to pay $12,000.00 for it.
5. Your attorney can file a motion to redeem vehicle and would ask the bankruptcy court to set the value of the car at $5,000.00. The secured creditor could object to your valuation, but the bankruptcy court will make the final determination of the car’s value based on the evidence. If the bankruptcy court grants the motion to redeem, you would pay the secured creditor $5,000.00 and they would be required to give you the title to the vehicle.
Redemption is a rarely used tool in bankruptcy. Clients in bankruptcy seldom have sufficient money on hand to pay the secured creditor the redemption value. However, there are many companies that specialize in providing redemption loans to people in bankruptcy.
Redemption may or may not be a helpful tool for everyone who files for bankruptcy. You should speak to an experienced attorney at Kent & Wittner, P.S. if you have any questions.