Redemption arrangements are rare, but can be functional.
In Chapter 7 bankruptcy, you can keep secured property by redeeming it – paying the creditor the replacement value of the property. Redemption is often a good option if you owe substantially more on the loan than the property is worth.
Secured Debt and Collateral in Chapter 7 Bankruptcy
A debt is “secured” if it has an item of property (called collateral) guaranteeing payment of the debt. If you default on the debt, the creditor can take the property. Examples of secured debt include mortgages and car loans.
In Chapter 7 bankruptcy, you must decide what to do with your secured debts. If you are not current on your payments, you will probably lose the property. You can give up the property (surrender it). If you want to keep the property, you can reaffirm the debt or redeem the property.
In most cases, if you want to redeem the property, your equity in the property must be protected by an exemption. If you have nonexempt equity, the trustee is likely to sell the property in order to pay your unsecured creditors.
What Does It Mean to Redeem Property in Chapter 7?
When you redeem property in Chapter 7 bankruptcy, you essentially buy it back from the creditor in one lump sum. The amount you pay is the “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. In many cases, the replacement value is less than what you owe on the debt.
If you and the creditor don’t agree on what the replacement value of the property should be, the court may hold a “valuation” hearing and decide the question for you.
If you choose to redeem property, once you pay the creditor the replacement value of the item, you own it free and clear.
Restrictions on Redeeming Property
You can only redeem property in Chapter 7 bankruptcy if you meet all of the following conditions:
- The debt is a consumer debt on goods used for personal or household purposes. This means you cannot redeem property that secures business debts or a car that you use for business purposes.
- The property is personal property. Personal property is all property other than real estate.
- The property is tangible. This means you can touch it. Intangible property includes things like investments, stocks and bonds, and intellectual property rights.
- The property is exempt or the trustee has abandoned it because it has little or no equity.
Advantages to Redemption
Redemption is often a good option if your debt is substantially greater than the value of the property. If you redeem the property, the creditor must accept the replacement value of the item as payment in full, even if you owe much more on the debt.
Disadvantages to Redemption
The main drawback to redemption is coming up with the money to buy the property back. Some companies specialize in lending to people seeking to redeem property; so a loan may be one way to get some cash fast. Or you might be able to get the creditor to agree to accept installment payments.