What is the Redemption Option in Chapter 7 Bankruptcy
There is a little-known process in Chapter 7 bankruptcy that can often enable you to keep your upside down car (or other personal property) and get it right side up. Redemption allows you to keep your personal property for which you owe more than it’s worth by paying off the present fair market value instead of paying off the debt in full. Most commonly this is used for car loans but it can be used for televisions or mattress debts as well as long as you can come up with the lump sum. We see it used most often for cars because the amounts are large enough that it has created a market for lenders to step in and become your new lender.
Pay Just the Fair Market Value in Chapter 7
Why does any bank want to step in and take over your car loan? Well, because they are going to pay a huge amount of interest on the loan, making anywhere between twenty to thirty percent on their loan. Do you care? Well, not really. If you are reducing the balance on your car loan, you generally end up with the same number of payments or fewer with a lower payment. Everyone wins except the original lender and, honestly, my days of feeling sorry for car finance lenders have long since passed.
So If you owe much more on your car than the fair market value and you really need to keep the vehicle, redemption might be a great way to go even if your new lender doubles your interest rate.
Redemption in Chapter 7 Not Just for Cars
Remember that redemption is not just for cars. Bankruptcy can be a great time to pay the furniture loan lender off the $300 bucks your couch is actually worth rather than the $1200 bucks you currently owe on it. This kind of redemption often doesn’t require a redemption lender.
How to Redeem Your Property in Bankruptcy
The steps for successfully redeeming your car are pretty straightforward:
First, determine the appropriate value of the vehicle, generally somewhere between the private party sale and retail resale.
Second, have your attorney get your lender to either stipulate to the value or negotiate a value that makes sense for both you and the redemption lender in terms of reducing either the number and/or amount of your payments.
Third, your a bankruptcy attorney will most likely need to file a motion to redeem with the court to get the redemption done. Luckily, if you are using a redemption lender, the fees for getting the motion filed can normally be paid through the closing of your new loan so nothing out of pocket.
Challenge of Redemption in Chapter 7 Bankruptcy
The challenge really is coming up with the fair market value of the vehicle, even if it is much less than its loan balance. One other potential challenge is deciding how to finance the redemption. You don’t have to use a redemption lender. All things being equal, it would be great to get the benefits of redeeming without taking on a high-interest loan. Unfortunately, most of us don’t have a relative or friend with the funds required to buy out the fair market value of your vehicle.
Keep in mind that redemption in Chapter 7 bankruptcy is not your only option for keeping an upside-down car and paying back only the fair market value. In Chapter 13 bankruptcy, if the car was financed over 910 days ago, you can always repay only the fair market value of your car through a Chapter 13 plan. You have the added benefit in Chapter 13 bankruptcy of reducing high-interest car loans to roughly six percent.
Contact Us to Keep Your Car
Contact Phoenix Fresh Start Bankruptcy Attorneys If you have an upside down car loan and need some guidance about what to do with it. We are always happy to help.