What is Redemption in bankruptcy?
Redemption is a process that is sometimes misunderstood. Redemption is the process of paying a lump sum payment to a secured creditor (lienholder) in exchange for the release of the lien. In Chapter 7 bankruptcy, a debtor can use 11 U.S.C. Section 722 to pay only the fair market value for the collateral, not the contractual balance.
Usually this situation arises when a debtor is financing a vehicle. Vehicles depreciate. Sometimes they depreciate rapidly. Most people I counsel owe more on their vehicles than what the vehicles are worth. Through the redemption process, a debtor could save thousands of dollars on principal and interest payments because the debtor only has to pay the “value” which is usually less than the “balance” on the loan. For example, if the debtor’s car is worth $10,000, but the debtor owes $15,000, the debtor could use the redemption process under chapter 7 bankrutpcy and force the creditor to release its lien after receiving only $10,000.
It is important to realize that there isn’t a redemption process in chapter 13. This is only something that can be done in chapter 7. The “catch” in the process is that most debtors I counsel don’t have a lump sum of money equal to the value of the vehicle they can pay at once. Some debtors might be able to get the money from friends or family or borrow from a retirement asset, but even for those debtors who don’t have sources of cash, redemption is possible.
Believe it or not, debtors can sometimes borrow the money to fund the lump sum payment needed to redeem. There are finance companies that offer financing for debtors in these specific circumstances. While it may be true that these finance companies charge higher than average interest rates, depending on the value of the car and the terms of the original loan, these transactions can be very beneficial for debtors and still result in thousands of dollars of savings over the life of a loan and significantly lower vehicle payments each month.
If you’re in this situation, make sure any attorney you choose knows about this process and can offer representation regarding this process in chapter 7. It could save you thousands of dollars on top of what you are eliminating in medical, credit card and other unsecured debt!
