Keeping Your Car In a Chapter 7 Bankruptcy Case: Redemption


While a Chapter 7 bankruptcy case discharges personal liability on a car loan, it does not extinguish or avoid the lien on the property. When a motor vehicle is not owned free and clear and is the collateral for a car loan, a second choice for keeping it in a Chapter 7 bankruptcy case is redemption. Debtors choosing to redeem a car must offer to pay the car lender the current market value of the vehicle in a lump sum, even if the value is less than the amount owed on the vehicle. Of course, a creditor must agree to the valuation of the vehicle for redemption purposes.

Section 722 of the Bankruptcy Code describes the process of redemption and contains certain requirements for debtors to meet in order to utilize it as an option in a Chapter 7 bankruptcy case. Redemption permits debtors to buy back or pay off a piece of secured property by paying only the current replacement value or the loan balance, whichever is less. It allows debtors to keep property while discharging the property’s underlying lien and the debtor’s personal liability.

To qualify for redemption, the debt on the property must be a consumer debt, which is a debt used primarily for personal, family, or household use. The property must be personal, tangible property such as automobiles, appliances, or furniture. Thus, you may not redeem land or a personal residence.

Debtors must typically pay to the creditor the replacement value of the property in a single lump sum within 30 days of the first Meeting of Creditors. If a debtor and car creditor cannot agree on the replacement value of the motor vehicle, the court may hold a valuation hearing to determine the replacement value. Also, the property must be either exempt or abandoned by the bankruptcy trustee.

For example, a debtor files Chapter 7 bankruptcy case and owes $9,000 on a car valued at $5,000. The debtor may redeem the car by paying the creditor $5,000 with the remaining $4,000 balance discharged as a general, unsecured debt in the bankruptcy case.

If you have purchased an automobile and are experiencing problems repaying the debt and are approaching default, call Loan Lawyers, bankruptcy attorneys in Fort Lauderdale who help individuals with problems related to the payment of their debts. Contact our office today by calling 954-523-HELP (4357) and see how we can help.