What is redemption in a bankruptcy case?

Bankruptcy redemption is an option in a Chapter 7 bankruptcy case that may allow you to keep a vehicle or other asset that is acting as collateral for secured debt. However, redemption may not be an option for all Chapter 7 debtors because it requires you to come up with cash up front.

Secured debt, as distinct from unsecured debt, is not just discharged in a Chapter 7 bankruptcy. If it were, the debtor would get to keep the asset that was supposed to be guaranteeing the loan and defeat the point of the secured debt in the first place. You as a debtor have a few different options for how to deal with this secured debt and the assets that go along with it. Bankruptcy redemption is one of those options.

Bankruptcy redemption essentially means that you will pay a secured creditor the current value of the property securing a debt. Bankruptcy redemption is only an option if you actually owe consumer secured debt. For example, suppose you owe $18,000 on a car that is now worth just $10,000. The lender is “under-secured,” which means it has a $10,000 secured debt claim and an $8,000 claim that is essentially unsecured. During the process of redemption in a Chapter 7 bankruptcy you can generally wipe out the lender’s lien on your car by paying the lender $10,000, which is the current value of the collateral for the secured loan. Your personal obligation to pay the remaining $8000 will then be considered part of your unsecured debt and will be eligible for discharge in bankruptcy.

If you chose this option and you pay the fair market value of the collateral, you will end up owing the car free and clear once the Chapter 7 bankruptcy discharge goes into effect and wipes out the remaining “unsecured” portion of the debt owed. This option makes good sense provided the value of your property is less than the balance due on your loan. However, you will need to be able to come up with the money to repay the actual value of the asset, which may be difficult if you are suffering from financial troubles.

If your property has not depreciated, however, and the loan amount you owe is lower than the property’s value, you may wish to consider other options for keeping the property, such as paying off the debt or entering into a reaffirmation agreement. In any case, you will want to speak with a Chapter 7 bankruptcy attorney before choosing redemption or before making any other key decisions in your Chapter 7 bankruptcy to ensure you are making a wise financial and legal choice.

Case Studies: Bankruptcy Redemption in Chapter 7

Case Study 1: Sarah’s Car Redemption

Sarah filed for Chapter 7 bankruptcy and had a car loan with an outstanding balance of $18,000. However, due to depreciation, her car was now valued at only $10,000. In this case, Sarah had the option of redemption. She decided to pay the lender the current value of her car, which was $10,000, thereby eliminating the lender’s lien. The remaining $8,000 became part of her unsecured debt, eligible for discharge in bankruptcy.

Case Study 2: John’s Property Redemption

John, another Chapter 7 debtor, owned a property with a mortgage loan. The property had not depreciated, and the loan amount was lower than its value. In this situation, John explored other options to keep the property, such as paying off the debt or entering into a reaffirmation agreement. Redemption was not the ideal choice for him since the loan amount was lower than the property’s value.

Case Study 3: Mark’s Jewelry Redemption

Mark, a debtor in a Chapter 7 bankruptcy case, possessed valuable jewelry that was acting as collateral for a secured debt. The outstanding balance on the loan was $12,000, while the current appraised value of the jewelry was $8,000. Mark had the option of redemption, which meant he could pay the lender the current value of the jewelry, i.e., $8,000, to eliminate the lender’s lien. The remaining $4,000 would then be considered part of his unsecured debt, eligible for discharge in bankruptcy.

Although Mark faced financial difficulties, he managed to gather the necessary funds to redeem the jewelry. By doing so, he would become the owner of the jewelry, free and clear, once the Chapter 7 bankruptcy discharge took effect. This option was viable for Mark because the value of the jewelry was lower than the balance due on the loan.