If you have a secured loan, such as a financed car, and you file a chapter 7 bankruptcy case, you have a few options available. You can surrender the car to the lender and you will not be liable for any deficiency, you can reaffirm the debt through bankruptcy, or you can redeem the vehicle. This article addresses redemption in the context of a chapter 7 bankruptcy.
Simply stated, redemption is paying a lump-sum amount after you file your bankruptcy to pay for the fair market value of an encumbered vehicle. For example, if your vehicle is worth $8,000 but you owe $16,000 (due to negative equity, etc.), redemption allows you to pay the lender a lump sum amount of $8,000 for the vehicle, as the lender, technically, is secured only up to the value that the vehicle is worth. Often times, however, the fair market value of a vehicle is contested between the lender and the debtor/borrower who filed bankruptcy; the lender will find a high-value for the vehicle quite frequently. Kelley Blue Book or Nada Guides are a good starting point to value a vehicle, also using a appraiser is helpful in establishing the value. If the fair market value of the vehicle cannot be agreed upon, a hearing may be required before a bankruptcy judge to establish the value of the vehicle.
The process to redeem follows: 1) Client files bankruptcy and indicates in his or her schedules that he or she will redeem the vehicle; 2) A motion is filed with the court regarding the redemption; and 3) if there is no objection to the motion, Client pays off lender in a lump-sum payment the fair market value of the vehicle and the lender transfers title to Client.
Redemption, therefore, is a powerful tool in our bankruptcy tool box. It provides a means to strip negative equity from a vehicle. The only hitch is that a lump-sum amount must be tendered to the lender to pay for the vehicle. Clients may be able to obtain new lending for this lump-sum payment in some circumstances.
If you are interested in learning more about bankruptcy, and how redemption may benefit your financial situation, please call for a free in-office bankruptcy consultation.