Auto Redemption in Chapter 7 Bankruptcy

July 27, 2009
During a Chapter 7 bankruptcy all unsecured debts are discharged. Debts that are
secured by collateral (e.g. car loans) must be paid or the collateral must be returned to the
lender. Occasionally an individual considering Chapter 7 bankruptcy will own a vehicle
that is worth less than what is owed. This situation is often referred to as “upside down”
and usually involves a late model vehicle that has depreciated faster than the person has
paid on the loan. It doesn’’t make any sense to pay for something that is “upside down,”
but often an individual needs to keep the vehicle for transportation to work and for family
Fortunately, a provision of the Chapter 7 bankruptcy code allows an individual to keep a
vehicle and pay only its current market value. This process is called “redemption.”
During a redemption the value of the vehicle is determined (either by agreement between
the debtor and creditor or by the bankruptcy judge after a hearing) and a court order is
issued directing the creditor to accept a sum from the debtor in exchange for a release of
its lien. In plain terms the lender is paid a lump sum and the lien on the vehicle is
released. For example, a debtor that owes $15,000 on an auto that is worth $10,000 will
only pay $10,000.
Unfortunately, the payment must be made in a one-time lump sum to the lender at the
time of the redemption order. If the debtor is unable to pay for the vehicle, there are
finance companies that make redemption loans for debtors in bankruptcy. Before making
a redemption loan these finance companies require a loan application and certain
assurances of repayment. The interest rate can be high for a redemption loan, however
the resulting monthly payment is often lower than the original payment. It is important to
carefully consider all of the advantages and disadvantages before making a decision to
redeem a vehicle:
Advantages of a redemption loan:
• Retention of the vehicle;
• Vehicle is no longer “upside down;”
• The creditor cannot repossess the vehicle;
• Usually results in a lower monthly payment.
Disadvantages of a redemption loan:
• High interest rate.
Redemption is not the only option for keeping a vehicle after a bankruptcy. A skilled
bankruptcy attorney can explain all of your options and help you obtain the best deal for
your family.  Contact Fears | Nachawati today for a free consultation to discuss bankruptcy and auto redemption by calling toll free 1.866.705.7548 or via e-mail at  
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