- Redemption is a good choice if the property is worth less than what the debtor owes and lien avoidance is inapplicable. The debtor may choose to redeem secured property if each of the following conditions applies--the debt is a consumer debt and not a business debt, the property is tangible, and the property is exempt under the bankruptcy code or the trustee abandoned the property because it has little value.
Under Chapter 7, a debtor has the right to "redeem" secured property. Because a creditor's interest is secured by the property, Chapter 7 bankruptcy will discharge the debtor's personal liability to repay the debt but it will not negate a creditor's right to place a lien on the property. To retain possession of the property, the debtor can choose to redeem the property by paying the creditor the replacement value. Note, "replacement value" for a vehicle is the retail value.
- Redemption allows a debtor to keep nonexempt property. It is an advantageous choice when the debtor owes more than the property is worth. Under bankruptcy law, the creditor must accept the replacement value of the property. This option is not only available for cars, but is also an option for other types of property, such as household items.
Advantages of Redemption
- The main disadvantage of redemption is that it requires the debtor to make one lump sum payment. A debtor can attempt to negotiate with a creditor for installment payments, but a bankruptcy court cannot force a creditor to accept a payment arrangement. If a debtor is unable to come up with a lump sum payment, the debtor may attempt to obtain a loan from a creditor that specializes in redemption loans.