Property Redemption in Bankruptcy

Redemption of secured property in bankruptcy is only available in Chapter 7. When a debtor has a loan secured by collateral, such as a car, the debtor has three choices: reaffirm the debt, surrender the property, or redeem the property. A debtor must notify the court of how to treat the secured debt by filing a “Statement of Intention.”

What is Redemption?

A debtor that files for bankruptcy can choose to keep secured property by redeeming it. To exercise redemption rights, the debtor must pay the creditor the present value of the property securing the loan. If the value of the property is less than what the debtor owes on the loan, the balance becomes unsecured debt eligible for discharge.

For example, if a debtor owes $15,000 on a car loan, but the present value of the car is only $10,000, the debtor can pay the creditor the amount the car is worth. The remaining $5,000 balance on the loan becomes unsecured debt that is dischargeable in Chapter 7. 

Redeeming Property

For many, paying the creditor the redemption value is the biggest obstacle in the way of redeeming the property. This is because the debtor must pay the entire redemption amount in one lump sum. The debtor cannot use money or other property that the trustee will use to pay creditors. There are several ways to acquire the funds, including selling exempt property, using post-petition money earned from working, obtaining a private loan from family, borrowing the money from a retirement account, or borrowing from a company that offers financing for special circumstances like redemption. 

Other Options

If the present value of the secured property is more than the balance on the loan, redemption may not be the best choice. Other options include the following:

Reaffirmation

If a debtor chooses to reaffirm the debt, this means that the debtor agrees to repay the money owed to the creditor even though the debt would be eligible for discharge in bankruptcy. The debtor must complete a written reaffirmation agreement and file it with the court. If, after considering the debtor’s income and ability to repay the debt, the court approves of the agreement, the debtor will remain personally liable for the debt.

Surrender

If a debtor chooses to surrender the property, it becomes unsecured debt. The creditor can sell the asset and keep the proceeds. If the creditor is unable to recover the full amount owed by the debtor, the balance owed is still dischargeable in Chapter 7.

Get Legal Advice

For more information on redemption rights, contact an experienced bankruptcy attorney in your area. Having a professional advise on your case can make all the difference in the world.