In Chapter 7 bankruptcy a debtor may have an opportunity to redeem some personal property. Redemption is not reaffirmation; but is similar in that the debtor gets to keep secured property in bankruptcy.
Let’s take a closer look at redemption in Chapter 7 bankruptcy:
What Is Redemption?
Redemption is when a bankruptcy debtor pays off the secured portion of a loan so that they can not only reduce their monthly debt payments but they can also reduce the loan balance and keep the property. When a debtor redeems personal property in bankruptcy, they are NOT reaffirming the debt. They are only paying off the secured portion of the debt. For example, if a bankruptcy debtor wanted to redeem a vehicle valued at $10,000 and it had a loan of $18,000 on it, they could use redemption. Using redemption, the bankruptcy debtor could pay the lender $10,000 cash and keep the property. Because the $18,000 loan is only secured up to $10,000, the remaining $8,000 balance would be treated as unsecured debt and might be discharged depending on the details of the bankruptcy case.
What Type Of Property Can Be Redeemed?
A bankruptcy debtor can redeem personal property only. This includes cars, household appliances and anything else used by the debtor and their household. Real estate is not considered personal property so it cannot be redeemed in bankruptcy. But there are other ways to keep real estate when a mortgage is not fully secured by the property’s value. Business property is not eligible for redemption in Chapter 7 bankruptcy. For example, while a bankruptcy debtor could redeem a personal computer, they could not redeem a computer used primarily for business purposes.
How Can A Debtor Use Redemption?
A debtor can work with their bankruptcy attorney to redeem property or they can file a motion for redemption with the bankruptcy court. Some creditors are more open to redemption than others so the debtor will need to decide which route is the best one. The bankruptcy debtor will also need cash or a loan to redeem some types of property. For most debtors, coming up with thousands of dollars to redeem personal property is difficult. But if the debtor plans carefully, they can redeem their most important assets in bankruptcy without causing additional financial distress.
What Are Alternatives To Redemption?
Redemption is just one way to keep personal property; there is also reaffirmation and the voluntary surrender of property. Each bankruptcy debtor must decide if it is worth it to keep property when weighing their options. With redemption you free yourself from future debt payments if you can pay with cash, while reaffirmation obligates you to post-bankruptcy debt that might otherwise be discharged.