In Chapter 7 bankruptcies there are two “R” words that are relevant to a person filing for bankruptcy that has a vehicle still encumbered by an outstanding loan. The first “R” word, reaffirmation, was discussed in a previous blog post. The subject of this writing, however, is the other “R” word, redemption. While these two terms sound somewhat similar and both deal with vehicles that have an outstanding loan, it is important not to confuse the terms, as application of each will lead to wildly different results.
Under a very specific set of circumstances, a person filing for Chapter 7 bankruptcy may avail themselves of a consumer right that is found in section 722 of the United States Bankruptcy Code. Under this law, an individual may be able to pay off the loan that is still owed on a piece of personal property for what the property is currently worth and not for what is stilled owed at the time that the bankruptcy is filed. In other words, if you are making payments on something that is worth less than what is still owed, you can pay off the loan for what the current value of the item is.
An example of redemption
By way of illustration, let us look at a financed purchase of a car as an example to help understand this principle. As the saying goes, the moment a car is driven off the lot of the car dealership, the car goes down in value. The individual that purchased the car could be potentially “upside down” in his loan the very moment that s/he drives the shiny new car home from the dealership, depending on the loan terms. As time passes, many individuals find themselves in a situation where the car continues to depreciate in value1)goes down in value at a faster rate than they are paying down the loan that they obtained to purchase the car. In a scenario like this, it is not uncommon to see a car worth about half of what the owner still has to pay to the bank in order to own the car outright. Talk about a bad investment! In this example, suppose a person owes $15,000 on a car loan, but the car is only worth $7,500. Redemption allows this person to pay off the $15,000 loan for only $7,500. What was once a terrible investment suddenly becomes a great opportunity.
From a practical stand point, most people considering filing for Chapter 7 bankruptcy do not have $7,500 or more laying around to pay off the vehicle. The redemption usually is made possible through third party financing that allows a person to get a new loan for much less money,2)see the $7,500 example above replacing the old loan. This invariably results in lower monthly payments and saves you money in the long run so you do not end up overpaying for a car. Obtaining the financing can be somewhat challenging due to the fact that there is an ongoing bankruptcy; however, there are lenders that specialize in extending loans for the specific purpose of vehicle redemption. Speaking with an experienced bankruptcy attorney that will help you navigate the various issues that might come up in vehicle redemption is highly recommended if you believe that you may be in a position to benefit from this powerful tool in Chapter 7 bankruptcies.
