By Attorney Stephen Elias
If you want to keep secured property in a Chapter 7 bankruptcy, you may be able to "redeem" it -- that is, pay the secured creditor for the property. Here's how redemption works and when you might want to use it in Chapter 7 bankruptcy.
Secured Debts in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, you must decide what you want to do with any secured debts you have. Secured debts are those debts for which your property (for example, a house or car) serves as collateral. If you default on the secured debt, the creditor can take the property.
One way to keep property is to redeem it. (Another option includes reaffirming the debt.) Here's how redeeming property in bankruptcy works, and when you might want to use this option.
Redeeming Secured Property
If you want to keep secured property, you may “redeem” it by paying the secured creditor the property’s current replacement value (what you would have to pay a retail vendor for that type of property, considering its age and condition), usually in a lump sum. Essentially, you are buying the property back from the creditor. In return, the creditor delivers title to you in the same manner as if you had followed through on your original agreement. You then own the property free and clear.
Example: Susan and Gary owe $500 on some household furniture with a replacement value of $200. They can keep the furniture and eliminate the $500 lien by paying the creditor the $200 replacement value within 45 days after the first creditors’ meeting.
Advantages. Redemption is a great option if you owe significantly more than the property is worth. The creditor must accept the current replacement value of the item as payment in full. If you and the creditor don’t agree on the replacement value of the property, the court will decide the issue in a proceeding called a “valuation” hearing.
Disadvantages. Most debtors will have to pay the full replacement value of an item in a lump sum in order to redeem it. It may be difficult for you to come up with that much cash on short notice. You may be able to get a loan; some companies specialize in lending to people seeking to redeem their collateral in bankruptcy. (For more information about these companies, see www.legalconsumer.com.) Or, you can try to get the creditor to agree to accept installment payments, but courts cannot require creditors to make this type of deal.
Restrictions. You have the right to redeem property only if all of the following are true:
- The debt is a consumer debt: one incurred “primarily for a personal, family, or house-hold purpose.” This includes just about everything except collateral for loans and credit obtained for business purposes.
- The property is tangible personal property. Tangible property is anything you can touch. A car, furniture, a boat, a computer, and jewelry are all examples of tangible property. Stocks are intangible. The property must also be “personal property,” which simply means it can’t be real estate.
- The property is either: claimed as exempt, or abandoned by the trustee. A trustee will abandon property that has little or no nonexempt value beyond the amount of the liens. The trustee may notify you of the abandonment or you may have to proactively request it. Once the property is abandoned, you can redeem it by paying the secured creditor its replacement value.
When to use it. Redemption may be a good idea if you really want to keep personal property, but you don’t want your liability for the debt to survive your bankruptcy (the latter occurs if you reaffirm a debt LINK). Use redemption only if you owe more than it would cost to purchase the property and you would not be able to get rid of the lien. It often makes sense to redeem small items of household property that you want to keep, because raising money for the lump sum payment probably would not be that difficult.
Redemption can also be used for cars, which are not eligible for lien avoidance and are likely to be repossessed if a lien remains after bankruptcy and you don’t agree to keep making payments. If the creditor won’t agree to installment payments, however, raising the cash necessary to redeem a car may be difficult.
How it works. You and the creditor must agree on the value of the property, then draft and sign a redemption agreement. Agreeing on the replacement value may take a little negotiation. Sometimes, you can get the creditor to accept installment payments if you agree to pay a higher total amount. Whatever you agree to, put it in the redemption agreement.
Excerpted from How to File for Chapter 7 Bankruptcy, by Attorney Stephen Elias, Albin Renauer, J.D., & Robin Leonard, J.D. (Nolo).