What Does Chapter 7 Redemption Mean
There are many bankruptcy strategies to assist honest debtors obtain a fresh start. One of the best tactics for Chapter 7 debtors is found in Section 722 of the Bankruptcy Code: Redemption.
Redemption is only available to Chapter 7 filers. (if you don’t know what chapter 7 entails, view this link) Chapter 7 allows the debtor to redeem secured collateral for an amount equal to the secured portion of the loan. In other words, if you have a car worth $7,500, and owe the lender $17,000, the secured portion of the loan is $7,500 and the unsecured portion is $9,500. You can redeem the car for $7,500 and the remaining $9,500 is subject to discharge at the end of your case.
Property is determined by its Replacement Value
The secured portion of property is determined by its “replacement value” – the price a retail merchant would charge for property of that kind, considering the age and condition of the property at the time you redeem it. See 11 USC § 506(a)(2). If you and the lender disagree on the replacement value of the property, the court may hold a “valuation” hearing and decide the question for you.
The typical starting point for a vehicle redemption is a retail value from one of the major consumer guides, such as Kelly Blue Book, NADA, or Edmunds. Then a court may receive evidence on the condition of the vehicle, including any repair estimates.
The custom for the majority of bankruptcy courts is to calculate replacement value as of the redemption date, not the petition date. See In re Morales, 387 B.R. 36, 45 (Bankr.C.D.Ca. 2008). Although some courts point to language in Section 506(a)(2) and use the petition date. In re Herrera, 454 B.R. 559 (Bankr. E.D.NY 2011).
Once the redemption sum is paid, the lender no longer has a secured claim against the property. One down side to redemption is that you must pay the secured portion to the lender in a lump sum immediately after the court approves your motion for redemption.
Payments are not allowed. Since most debtors are cash-strapped, this can be a significant problem. Financial transactions, including debts, that occur after a Chapter 7 bankruptcy filing are outside the court’s jurisdiction. In the end, the debtor may borrow the money from a friend, family member, or a bank without including the debt in the bankruptcy case.
Redemption financing
Not surprisingly, lending sources have sprung up to offer redemption financing, such as 722 Redemption Funding, Leap Financial, and Fresh Start Loan Corporation. The process for obtaining a redemption auto loan is very similar to qualifying for a traditional loan.
Finance companies require a loan application and assurances that you will be able to repay the loan (e.g. steady employment, reasonable debt to income ratio, good payment history, etc).
The interest rate can be high for a redemption loan, however the resulting monthly payment is often lower than the original payment. For instance, suppose a debtor borrowed $25,000 at 4.9% interest with a repayment term of 5 years.
The payments are $459.29 per month. After 20 payments, the debtor still owes $17,201 and has 40 more payments remaining. The car was in an accident, has high miles, and is now only worth $7,500.
Obtaining a loan for $7,500 will redeem the vehicle from the original creditor, but the redemption loan company wants to charge 21% interest! However, a $7,500 loan at 21% interest over 24 months is only $385 per month!
You reduced your car payment by $74 each month, you shaved 16 months of payments off your loan, and you discharged all of the car’s negative equity!
Each situation is different, so be sure to calculate your savings to ensure that redemption is a wise decision. It is important to carefully consider all of the advantages and disadvantages before making a decision to redeem a vehicle:
- Advantages of a redemption loan:
- Retention of the vehicle;
- Vehicle is no longer “upside down;”
- The creditor cannot repossess the vehicle;
- Usually results in a lower monthly payment.
- Disadvantages of a redemption loan:
- High interest rate.
Discharging vehicle debt will make it more difficult to finance a vehicle after bankruptcy.
Vehicles are not the only secured property that can be redeemed, but only property that meets the following qualifications can be redeemed in a Chapter 7 bankruptcy:
1. The debt is a consumer debt, meaning the item is used for personal or household purposes. Vehicles, household furniture and household appliances generally qualify. Business property cannot be redeemed.
2. The debt is secured by personal property, not real estate.
3. The property is tangible, not investments, stocks and bonds, and intellectual property rights.
4. The property is fully exempt or the trustee has abandoned it because it has little or no equity.
Redemption is only one of the tools bankruptcy attorneys employ to reduce debt and retain property. If you are struggling with bills you cannot pay and loans that are upside-down, speak with your bankruptcy attorney and learn how the federal bankruptcy laws can help you.
