Using the Redemption Option to Keep Your Car in a Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows individuals to obtain a fresh start by discharging most of their debts while liquidating their assets to pay off creditors. However, there are ways that debtors can shield a substantial amount of their assets from liquidation. One of these is the redemption option. A debtor can keep a financed car by paying off the current fair market value, which can be significantly less than the outstanding loan amount.

The ability to retain secured possessions through redemption adds a layer of flexibility to the Chapter 7 bankruptcy process. For example, if you owe $15,000 on a car that is now worth only $8,000, you can wipe out the lien on your car by paying the lender $8,000. Your personal obligation to pay the remaining $7,000 will then be considered part of your unsecured debt and thus be eligible for discharge in bankruptcy.

The redemption option may not be available for all debtors because it requires cash up front. If you have difficulty coming up with the cash to pay the redemption amount, you may be able to secure a loan from a redemption financer. Such loans are usually at high interest rates, but you will paying off a reduced amount over a longer period of time, so it will likely be more manageable.

Redeeming your car in bankruptcy involves these steps:

1. You need to obtain an appraisal of the fair market value of the vehicle, which usually will fall between the value for a private party sale and that for a retail resale.
2. If you are seeking a loan, your attorney will negotiate with the redemption financer to set the value of the vehicle, which will determine the payoff amount and terms.
3. Your attorney will file a motion to redeem with the bankruptcy court. The court will evaluate whether the solution is fair to other creditors.

Before opting for redemption, you should consider whether the fair market value of the property makes it worthwhile to take on another financial obligation. An experienced bankruptcy attorney can advise you about other options that may be available.

If you are instead pursuing a Chapter 13 bankruptcy, and if your car was financed over 910 days prior to filing the petition, you can keep the car by repaying just its fair market value under the Chapter 13 plan. You also may be able to have the interest rate reduced.

While cars are a common subject for redemption, the option extends to various personal property items, such as electronics, furniture or jewelry.

Jeff Field & Associates represents clients throughout Georgia in all aspects of bankruptcy and debt relief. We have offices in Scottdale, Gainesville, Marietta, Lawrenceville, Douglasville and Athens. To schedule an appointment, call us at 404-381-1278 or contact us online.