How does auto redemption work in bankruptcy?

Redemption is one way of handling secured debts in Chapter 7 bankruptcy. Secured debts are debts that give creditors the right to take the property securing the debt if the debtor defaults. For example, a car loan generally gives the lender the right to repossess the car if you don't make your payments. 

When your Chapter 7 case ends and you receive your discharge, your personal liability for your car loan will be wiped out. The lender can't sue you to collect that money because you no longer owe it. However, the lender still has the right to take back the car; this isn't affected by your bankruptcy case. If you don't need the car, you can simply surrender it to the creditor and wipe the slate clean. If you want to keep the car, however, you'll have to satisfy your obligation to the creditor. 

One way to do this is through redemption. You redeem property by paying the creditor what you still owe on it or what it's worth, whichever is less. Even if you owe more than your car is worth, you can redeem it -- essentially, buy it back from the creditor -- by paying the creditor its fair market value: what you would have to pay to buy a similar car, of similar age and in similar condition. Your bankruptcy case will take away the creditor's right to do anything beyond repossessing the car, so it's only fair that you shouldn't have to pay more than it could sell for. 

To redeem a car, you'll have to come up with a lump sum payment of what you owe or what the car is worth, whichever is less. This puts redemption out of reach for many debtors. Coming up with a chunk of cash, especially after filing for bankruptcy, can be really tough. But if you can scrape enough together, redemption gives you a way to keep your car, without having to keep making payments or agree that you will still owe the debt after your bankruptcy case is over.