Upside Down Property During Chapter 7
There are many bankruptcy strategies to assist honest debtors obtain a fresh start. One of the best tactics for Chapter 7 debtors is found in section 722 of the Bankruptcy Code: redemption. Redemption is only available to Chapter 7 filers. It allows the debtor to redeem secured collateral for an amount equal to the secured portion of the loan. In other words, if you have a car worth $7,500, and owe $17,000, the secured portion of the loan is $7,500 and the unsecured portion is $9,500. You can redeem the car for $7,500 and the remaining $9,500 is subject to discharge at the end of your case.
The secured portion of property is determined by its “replacement value” – the price a retail merchant would charge for property of that kind, considering the age and condition of the property at the time you redeem it. If you and the creditor disagree on the replacement value of the property, the court may hold a hearing to decide the vehicle’s value. The typical starting point is a retail value from one of the major consumer guides, such as Kelly Blue Book, NADA, or Edmunds. A court may also receive evidence on the condition of the vehicle, including any repair estimates.
Once the value is settled, the court will order the redemption. The debtor must pay the creditor in a lump sum. Once paid, the creditor no longer has a secured claim against the property. Since a lump sum payment is often beyond the debtor’s financial abilities during bankruptcy, lending sources have sprung up to offer redemption financing, such as 722 Redemption Funding, Leap Financial, and Fresh Start Loan Corporation. The process for obtaining a redemption auto loan is very similar to qualifying for a traditional loan. Finance companies require a loan application and assurances that you will be able to repay the loan (e.g. steady employment, reasonable debt to income ratio, good payment history, etc).
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.
Only property that meets the following qualifications can be redeemed in a Chapter 7 bankruptcy:
- The debt is a consumer debt, meaning the item is used for personal or household purposes. Vehicles, household furniture and household appliances generally qualify. Business property cannot be redeemed.
- The debt is secured by personal property, not real estate.
- The property is tangible, not investments, stocks and bonds, and intellectual property rights.
- The property is fully exempt or the trustee has abandoned it because it has little or no equity.
If you have “upside down” property, speak with an experienced bankruptcy attorney about the options available under the federal Bankruptcy Code. Bankruptcy can discharge debt, restructure loans and payments, and help a family get a fresh financial start.