What is the Right of Redemption in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is called liquidation because some of the debtor’s property is converted to cash to pay back creditors. However, property that is subject to secured loans is treated differently. The asset can be repossessed by the lender when the debt is discharged. But Chapter 7 filers may have secured personal property that they would like to keep, even if they still owe money on it. Chapter 7 contains a provision called redemption that can be of great advantage to debtors in this situation.

Using redemption, the debtor buys back an item of secured personal property by paying its current value, which is often much less than the amount owed on the loan. For example, let’s say you have a vehicle that is worth $10,000 but you still owe the bank $20,000 on the loan. If the court grants the redemption request, you can pay the bank $10,000 and the car is yours, free and clear.

The redemption option is most often used to keep a car. However, it can be used for any item of personal property that meets these requirements:

• The property is collateral for a secured debt (in other words, subject to an outstanding loan)
• The debt is personal debt, not business debt
• The item falls under a bankruptcy exemption or be abandoned by the Chapter 7 trustee
• You can afford to pay the item’s current value in one lump sum

Aside from cars, redemption is used to keep household appliances, furniture and other tangible personal items that you have financed. Unfortunately, you cannot use redemption to keep a home or other real estate; but there may be other methods a bankruptcy lawyer can recommend to do so.

Advantages of redemption include the fact that you pay only the true value of the property even if you owe more than that, and creditors cannot block redemption if the court allows it. On the downside, it is sometimes difficult to come up with enough money to make the lump sum payment. However, it may be possible to work out an arrangement with the lender to let you pay in installments.

The Law Offices of Michael Jay Berger helps clients exercise their redemption options. Our Beverly Hills lawyers have decades of experience handling Chapter 7 proceedings. Schedule a free initial consultation with one of our attorneys by calling 310-271-6223 or contact us online.