Wouldn’t it be nice in everyday life to be able to pay off your car for less than you owe?

Unfortunately, outside of bankruptcy secured creditors generally demand to be paid in full on their loans.

But in Chapter 7 bankruptcy, you can redeem the asset by paying its fair market value in a lump sum.

Who Said Filing Bankruptcy Has No Redeeming Values?

Redemption is a nifty little option available in Chapter 7 bankruptcy cases.

Section 722 of the Bankruptcy Code enables a debtor who filed the Chapter 7 case  to pay off a lien secured by personal property for the fair market value of the property, regardless of how much is owed.

An Example:

Let’s say you own a car that is financed.

Due to depreciation and lots of miles driven, your car is only worth $5,000, but you still owe the bank $10,000.

Outside of bankruptcy you would have to pay the $10,000 in full before you get title to the vehicle.

But in a Chapter 7 case, you can “redeem” the vehicle by paying the creditor a lump sum payment of $5,000 after which you will receive title to your vehicle, and have no further finance payments (assuming you receive a discharge in your Chapter 7 case).

Redemption is not limited to vehicles, but to any personal property subject to a security interest which meets the requirements (see more below).  This could include a boat, plane, jewelry, computer, and so on.

What’s the Catch?

There are a few issues with doing a redemption.  The main issues are:

  1. Establishing the redemption value of the property;
  2. Making sure the Trustee has no interest in selling the property (in other words, it is exempt or Trustee has abandoned the property)
  3. Coming up with the funds to make the required redemption payment
  4. Obtaining Bankruptcy Court Approval

Redemption Value

The valuation issue often requires the bankruptcy court to make a determination of which valuation source is appropriate under the circumstances.   For vehicles,  bankruptcy courts have required redemption payments based on the blue book trade-in value, private party value and sometimes even retail value (adjusted for certain realities).   I have successfully argued for the lower trade-in value, but the majority of judges come down somewhere in the private party valuation range, again with certain adjustments to be made.

It is important to have an attorney who is familiar with the court opinions in the district where the case is filed, as well as the preferences of the specific Judge assigned to the case.   This is crucial because the difference in cost between trade-in and retail value can be quite large, and it may not make sense to redeem at the higher value.

Trustee Interest

One of the requirements of Section 722 is that the property being redeemed must be exempt or abandoned.  What this boils down to is that the Trustee cannot be interested in selling it to pay creditors.  So, if there is any non-exempt equity in the property, no redemption can take place unless and until the Trustee decides not to liquidate that asset (termed “abandonment”).

Making the Payment

This is by far the biggest impediment to redemption.  Redemptions cannot be done by making installment payments; they require a lump sum payment, and that can be very difficult for someone who just filed bankruptcy.

However, there are organizations that lend money (at high interest rates) for this purpose during a bankruptcy case.

Sometimes it can result in a lower monthly payment despite the high interest, and enable the asset to be paid off sooner.    Having a rich relative lend (or give) you the money would be easier, of course.

Obviously an analysis of all the options and numbers is important prior to deciding to redeem.

Court Approval

In order for the redemption to be valid and the lien removed after payment, one must file a Motion with the bankruptcy court to approve the redemption.  It is in that motion that the proper arguments must be made for which valuation standard should be used.

Should You Redeem Your Personal Property?

As with all things in bankruptcy, an experienced bankruptcy attorney will be able to advise you on whether redemption is in your best interest and what the cost will be to obtain court approval.   In many cases redemption is not feasible, but there are times when it can be very beneficial.

Photo by Steven Depolo