Redeeming a Car Loan in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy you can "redeem" your car by paying the car's fair market value to the lender in one lump sum.
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If you owe more on your car than what it’s worth, Chapter 7 bankruptcy allows you to get rid of your loan by paying the lender an amount equal to the car’s fair market value. This is referred to as redeeming your car. Read on to learn more about how to redeem your car in Chapter 7 as well as the pros and cons of redemption.
How Do You Redeem Your Car in Chapter 7 Bankruptcy?
If you want to redeem your car, you have to file a motion in your bankruptcy and have the court approve the redemption. As part of your motion, you also need to provide evidence of the vehicle’s value. If the lender objects to your motion, you may have to negotiate and come to an agreement regarding the car’s value. Otherwise, you will need to prove to the court that your valuation is more accurate than the lender’s.
If your motion is approved, you must pay the lender the fair market value of the car in a lump sum payment. After you pay, the lender will release its lien and you will own the car free and clear (the unpaid portion of the loan is wiped out). As a result, redemption is an attractive option for debtors who are significantly upside down on their car loans.
Example. Jane owns a car worth $5,000. However, she still has a balance of $9,000 on her car loan. In her Chapter 7, Jane can request to redeem her car for its fair market value of $5,000. If her request is approved, Jane would pay the lender $5,000 and own the car free and clear. The remaining $4,000 of her loan balance is wiped out.
Benefits of Redeeming Your Car
Below, we discuss some of the major benefits of redeeming your car in Chapter 7 bankruptcy.
You Can Save a Significant Amount of Money
If your loan balance is much greater than what your car is worth, redeeming it will save you a lot of money. When you redeem, you wipe out the entire balance of the loan by paying the lender only the value of the vehicle. In addition, you may be saving a lot more on interest payments if you had a high interest loan.
You Will No Longer Have to Make Loan Payments
After you redeem your car, you own it free and clear. This means you no longer have to make monthly loan payments to your lender (unless you had to take out a loan to redeem). As a result, you will have extra cash each month to spend on other things.
Drawbacks of Redeeming Your Car
Even if it would save you money, you may not always be able to redeem your car. Below are some of the drawbacks of redeeming a car.
You May Not Have Enough Money to Redeem
Since you have to make a lump sum payment to the lender, you may not be able to afford to redeem your car. This is especially true if your car is worth a lot of money. If you don’t have the money, you can get help from your friends and family or take out a loan. There are firms who specialize in redemption loans. However, you may not be able to qualify or the interest rate may be very high.
You Cannot Redeem Business Vehicles
You can only redeem cars you primarily use for personal or family needs. So if you have a business vehicle, you may not be able to redeem it in your Chapter 7 bankruptcy.
To learn about other options for dealing with your car and car loan, see Your Car in Chapter 7 Bankruptcy.