Redemption is a tool available only in a Chapter 7 Bankruptcy. It allows you to pay off a loan by paying an amount equal to the value of the loan collateral. However, redemption may not be an option for all Chapter 7 debtors because it requires you to pay off the loan in a lump sum.
Many people who file bankruptcy have assets that are collateral for a loan, such as a car with an auto loan or furniture, electronics, or appliances that were purchased on credit. Often, those items have depreciated significantly and the value of the property is much lower than the loan amount. For example, your car loan balance is $15,000, but the value of your car has sunk to $10,000. Or, you purchased a computer and owe a balance of $1,500, but the computer is now only worth $500.
Redemption is only available for personal property used primarily for household purposes, such as personal vehicles, furniture, household appliances and household electronics.
With redemption, you pay the lender a lump sum equal to the current, depreciated value of the asset. To redeem property in bankruptcy, you file extra paperwork with the Bankruptcy Court called a “Motion to Redeem”. If the Motion is granted, the Bankruptcy Court will issue an Order requiring the lender to release its lien on the collateral in exchange for the redemption payment.
You must be prepared to pay the redemption price in a lump sum. That can be a problem if the redemption price is several thousand dollars. Fortunately, some lenders provide financing to people in bankruptcy seeking to redeem collateral. These lenders charge high interest rates, but you often save money overall because the principal amount you are paying back is lower. You would basically use bankruptcy to refinance your loan, probably with a higher interest rate, but with a lower principal amount.
If you would like more information about redemption in Chapter 7 bankruptcy, please feel free to contact Brian T. Hemphill.