Redeeming Property in Chapter 7 Bankruptcy

If you want to keep property secured by a debt in Chapter 7, you can redeem it. Learn how.

by:  , J.D.

When you file for Chapter 7 bankruptcy, you may be able to keep your secured property if you can pay its current replacement value. Under Section 722 of the bankruptcy code, this process is called “redemption.” If you can meet the requirements of Section 722, you can take advantage of redemption and keep your car or other tangible personal property while saving money.

Essentially, redemption allows you to buy back or pay off your secured property by paying only the current replacement value or the debt left on it, whichever is less. However, you should weigh the advantages and disadvantages to determine if redemption is right for you.

What is Secured Property and How Can I Redeem It?

Secured property is property which acts as collateral for a loan. If you don't pay your debt, the security agreement allows the creditor to take the property. Ordinarily, secured property also carries personal liability. This means that if the creditor repossesses the property and sells it, and the sales price isn't enough to cover your loan balance, you're on the hook for the remainder of the balance (called the deficiency balance).

Chapter 7 bankruptcy discharges your personal liability on the loan, although the lien on the property remains. With redemption, you are able to keep the property and discharge the lien along with your personal liability. You do this by paying the property’s replacement value instead of the amount you owe on it (unless it is less than the replacement value).

What are the Requirements and Restrictions of Redemption?

Although redemption is a relatively simple process, it does not apply to all types of property. Also, there are certain procedures to follow and circumstances under which you cannot redeem property. If you meet the following guidelines, you will most likely be able to redeem your secured property:

  •  The debt on the property must be a consumer debt, which means it was used primarily for personal, family, or household use.
  •  The property must be personal tangible property, which means you can touch it. This means that you can redeem secured property such as automobiles, appliances, and furniture, you cannot redeem land or your home.
  • You must be able to pay the replacement value of the property in a single lump sum to the creditor within 30 days of the first 341(a) Meeting of Creditors. If you cannot agree on the replacement value with the creditor, the court can hold a valuation hearing to determine the replacement value. Although the creditor is not required to accept anything other than a lump sum, there are several financial institutions specializing in redemption loans and financing.
  • The property is either exempt under your jurisdiction’s bankruptcy exemptions or the bankruptcy trustee has abandoned it. The trustee will abandon secured property when its equity minus the exemption is less than the fair market value. In practice, this means that the trustee will abandon property worth less than the debtor owes on it. (To learn more about how exemptions work and which state exemption system you can use, see our articles in  Bankruptcy Exemptions.)

When Should I Redeem Secured Property?

Redemption is often a good choice if your property is worth much less than the balance on the loan. With redemption,  you are potentially saving thousands of dollars by paying only the replacement value of the property, regardless of what you still owe.

For example, if you own a car worth $5,000 but you still owe $10,000 on the loan, you can redeem the car by paying the creditor $5,000. The car is now yours free and clear. The creditor cannot object if you follow the above guidelines and pay the $5,000 in a single lump sum.

Although redemption is mostly used to keep automobiles, you can also use it to keep electronics or household appliances you have financed. Since electronics are quick to drop in value, you may want to consider redemption if they are still relatively new.

Another reason to redeem your property is that it will be difficult to purchase new property on credit for a few years after your bankruptcy. If you need the property (for example, a car that gets you to work) and it's in good working condition, consider redeeming it as opposed to letting the creditor take it back and then trying to purchase similar property after your bankruptcy.

Advantages of Redemption

  • You can keep nonexempt property.
  • You only have to pay the replacement value of your property, regardless of how much you owe.
  • The creditor cannot object as long as you are paying the replacement value of the property.
  • You may not have to pay the replacement value in one lump sum if you can get a redemption loan.  

Disadvantages of Redemption

  • You can only redeem tangible property. So you cannot use redemption to keep your home.
  • Unless you can obtain a redemption loan, you have to pay the replacement value in one lump sum.

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