What is redemption in a bankruptcy case?

Get Legal Help Today

secured lock Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jul 15, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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. 

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption