Redeeming Your Car in a Chapter 7 Bankruptcy
How to Redeem Your Car in a Chapter 7 by Paying the Value
People are often concerned that if they file bankruptcy they might have to surrender some of their personal assets to the court to be liquidated to pay creditors. In reality, this only happens in a very small number of bankruptcy cases. Other debtors (the people who file bankruptcy) might be concerned about continuing to pay for the property that serves as collateral on debts they owe. While the debt might be discharged in the bankruptcy case, the security agreement that covers the collateral is not discharged. Therefore, if you want to keep that car, you will have to continue making payments or at least pay the creditor the value of the car.
When you file Chapter 7, you have at least three choices in how you deal with your car loan:
- Surrender your car to the lender
- Reaffirm the debt
- Redeem it for its value
In this article, we will talk about redeeming the vehicle for its value. For more information about reaffirming the debt, instead see the article What is a Reaffirmation Agreement?
Redemption = Paying the Value
Essentially, redeeming a car means paying the lender the market value of the car or the outstanding balance, whichever is lower.
Every car loan involves two agreements. First, there’s the promissory note. The lender gives a sum of money to the borrower, and the borrower agrees to pay it back.
Then, there’s the security agreement. In order to entice the lender to put up the money, the borrower agrees to give the lender a security interest in collateral – often the property that the borrower is purchasing with the money from the lender. If the borrower does not pay, the lender has a right to repossess and sell the collateral to get back at least a portion of what is owed on the loan.
At a minimum, the lender can expect to get back the value of the vehicle, either through sale of the collateral or payment by the borrower.
In a bankruptcy case, the lender still has the right to expect payment of the value of the vehicle. Even if you did nothing about the car during the bankruptcy and your liability under the promissory note was discharged along with your other debts, the lender would still have the right to repossess the car and sell it after the case is over.
If you want to keep your car, you have to take some action to keep the lender from getting your car. When you redeem the car in the bankruptcy, you pay the lender either the outstanding balance or the value of the car, whichever is less.
This can sound really good if you don’t owe much on the vehicle or if you owe more than the car is worth, which is true of many loans. But, there’s a big downside to redemption. Generally, you must pay the value to the lender in a lump sum. Most people who file bankruptcy will not have the ready cash necessary to make this happen.
Redemption Funding to the Rescue
There is, however, an alternative. Over the last several years, specialty lenders such as 722 Redemption have popped up on the Internet offering to finance the redemption amount. These redemption funding companies charge a relatively high interest rate, but the new loan may be worth it if redemption of the original debt saves you money over what you would pay the original lender. It is also worthwhile to contact other lenders, like your credit union or the bank where you keep your deposit accounts, especially if you owed them no money that will be discharged in the bankruptcy.
Redemption is not a rare occurrence, but it is usually not included in the standard fee that a bankruptcy attorney charges. The attorney will probably ask for an additional fee because of the time and paperwork involved in making it happen. If you chose to go through a redemption financing company, many times the new lender will finance the additional attorney’s fee, also.
How to Redeem a Car in Chapter 7
- Determine how much your vehicle is worth. Two good places to look are NADA and Kelley Blue Book.
- Compare the value of your car with the amount your lender says you owe. If the value is significantly lower, it might be worth your while to pay off the value or to apply for redemption financing.
- Talk with your bankruptcy attorney about whether it is feasible for you to redeem your vehicle.
- Your attorney may recommend a redemption funding company. You can also find several online by searching for “redemption funding” or "redemption financing”. Two of the biggest players in the market are 722Redemption.com and FreshStartLoans.com.
- Once you apply for financing, your attorney may have to do some negotiating with the original lender on the value and the condition of your vehicle.
- Once you’ve come to terms with the lender, your attorney will prepare and file with the court a Motion to Redeem. The redemption must be approved by the bankruptcy judge, but depending on your local procedures, it may not ever be necessary for you to appear in court. Of course, your attorney will explain your court’s process in more detail.
- Once the court approves the redemption, the new lender will pay the old lender (and will pay your attorney any agreed-upon fee for handling the redemption). The old lender will release the old lien, and you will now be liable to the new lender on your new loan.
Since the new loan was made after you filed bankruptcy, the new loan is not discharged in the bankruptcy case. If you fail to make the payments as agreed, the redemption lender will have all the rights available under its security agreement and under state law to either repossess or force payment.
Updated March 2017 by Carron Nicks