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What is Redemption in Ch 7?

Serving Families Throughout Mobile

When an individual person files a Chapter 7 bankruptcy case, they may have an opportunity to pay an auto lender, or a lender who took household goods as collateral, less than what is owed under the loan agreement.

Redemption is allowed under Title 11 U.S. Code, Section 722, which states:

“An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.”11 U.S. Code, Section 722

In order to “redeem” your loan, you must file an application, or “motion” with the U.S. Bankruptcy Court where your case is pending. The motion must be filed prior to the case being closed by the Court, before the Discharge Order is entered. Redemption is feasible if the fair market value of the property securing the loan is worth significantly less than what is owed under the loan agreement. An example would be a situation where the Debtor is locked into a high interest secured auto loan for $20,000.00, where the vehicle that secures the loan is only worth $10,000.00 at the time of filing of the bankruptcy. This is a common occurrence in bankruptcy matters, because people usually delay filing a bankruptcy for months, and sometimes years while their credit score stays in the 400-500 point range. Older car loans are sometimes rolled into a new high interest car loan by the debtor long before filing a bankruptcy case, because that is all the debtor can afford, while requiring transportation for work or family obligations.

Redemption is most commonly applied in the above-described auto loan scenario. There are specialized lenders such as who can provide funds for a new “redemption” loan for the lower principal amount, as determined by the Bankruptcy Court. See: 722 website at: Redemption Loan Funding

If you have questions about redeeming a loan inside of a bankruptcy case, Call me. I'll BE there for you. -Kevin Ryan, Bankruptcy Attorney

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