Vehicle Redemption in Chapter 7 Bankruptcy: Pay Only What the Car Is Worth
Retaining Property Securing Debts in Chapter 7
When you file a Chapter 7 bankruptcy, you must include in your bankruptcy petition a document called a "Statement of Intention," in which you make an initial declaration of whether you intend to retain or surrender property serving as collateral securing debts, such as a home or a vehicle with regard to a mortgage loan or vehicle loan. If you check the box on the form to "retain" a vehicle, you have 3 further choices: (1) to "reaffirm" the debt on the whole (i.e.,, sign a "reaffirmation agreement" putting yourself back on the hook for the debt that the vehicle secures as if you'd never filed bankruptcy at all) ; (2) to retain the vehicle by some other means than a reaffirmation agreement (options here are more limited than they were before the 2005 Bankruptcy Code amendment enacted by Congress); and (3) to redeem the vehicle. Reaffirmation is discussed elsewhere on this Blog.
What Is Redemption?
Redemption, however, is a process through which you essentially buy your own car back out of the legal "bankruptcy estate" containing all of your property by default that is created automatically when you file a bankruptcy petition. Why would you want or need to do that? When you are talking about a vehicle that you might redeem, you have not a vehicle that is owned in full, free and clear, but a vehicle that is serving as collateral for, in most cases, the loan you took to buy the car. Depending upon what you paid for the vehicle, the interest rate, whether you rolled a former loan into it, and the condition of the vehicle, you very likely have a car on your hands that is worth considerably less than you owe. Very few vehicles subject to a lien for the purchase loan are worth more than is owed on them. The redemption option allows you to pay to the creditor holding the lien on the vehicle only what the vehicle is actually worth in fair market value terms, with the balance to be then discharged entirely by the Chapter 7 bankruptcy discharge, along with the rest of your debts. In short, if you redeem a car in Chapter 7 bankruptcy, you come out of the bankruptcy still owning the vehicle with no obligation to make any further payment, and the lien-holding creditor must release its lien with the Michigan Secretary of State.
Redeem a Car in Chapter 7 Bankruptcy: What Are the Downsides?
The primary downside of redeeming a car is that you must actually have the money to repay the creditor very quickly and generally in a lump-sum form the value of the vehicle. And just because the vehicle is "underwater" relative to the loan balance attached to it does not mean it is necessarily worth a very small amount of money. If your car is worth $11,000 and you owe $18,000, redemption may be a great deal—but you still have to have $11,000 (or be able to borrow or otherwise obtain it) in order to redeem the vehicle. A further downside is that the creditor holding the lien is usually not going to simply to take your word for the vehicle's value. The creditor may want to appraise the vehicle's current condition themselves, and their appraiser may come up with a different number than you did. The creditor may decide that they want to litigate the issue of the vehicle's value, bringing you in front of the judge in your case for an evidentiary hearing or other proceeding to resolve the disagreement. Settlement of some sort is almost always something that an experienced bankruptcy attorney can assist you with, but, regardless, a redemption attempt is very likely going to cost you something further in terms of fees paid to your attorney after the filing fee for your Chapter 7 itself.
Redeem a Car in Chapter 7 Bankruptcy: The Bottom Line
The bottom line regarding Chapter 7 redemption of vehicles is that it is a right you are entitled to under the US Bankruptcy Code—but the practical considerations may outweigh or lean you against its benefits. The difference in value between your particular vehicle and your particular loan balance has got to be sufficient to make it all worth your while. If your car is worth only $1000 less than you owe, very likely that difference is going to be eaten up in time and additional attorney fees. If your car has a high fair market value, you may simply not be able to obtain the funds for the redemption, besides. However, for the right Chapter 7 case, for the right car, redemption is a wonderful option that, again, removes the power from the lien-holding creditor and hands it to you. The ability to redeem a car that still has many good years of functionality left in it and to exit a 4-month Chapter 7 with no ongoing car payment can be a great advantage as you begin your fresh financial start. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading "How Do I Redeem a Car in Chapter 7 Bankruptcy?," please browse our other articles on our main Michigan Bankruptcy Blog.