If your vehicle is worth less than its debt, and you can get the money representing that value, you can “redeem” the vehicle free and clear.
Two blog post ago we went through a list of ways Chapter 7 buys you time with your vehicle lender. Included was that it buys “time to gather funds to redeem your vehicle for less than you owe on it.” This “redemption” option deserves more attention.
Reaffirmation and Redemption
If you want to keep your vehicle in a Chapter 7 “straight bankruptcy,” your two options are “reaffirmation” and “redemption.” You can either reaffirm the debt or redeem the vehicle.
Reaffirmation is far more common. You enter into a reaffirmation agreement, agreeing to repay the loan as if you had not filed bankruptcy. You almost always recommit to paying the entire loan balance, reaffirming that you want to pay it. You agree to remain liable on the original loan, excluding it from the discharge that you are receiving of all or most of your other debts. (We covered reaffirmation a few months ago.)
Redemption is far less common. But it can sometimes save you lots of money so it’s worth knowing about.
Redemption in Contrast to Reaffirmation
It might help to think of redemption as being the opposite of reaffirmation in three ways:
- You don’t resurrect the vehicle loan (excluding it from the discharge of debts) as in reaffirmation. With redemption you get rid of the loan.
- You don’t agree to pay the full amount of the loan. With redemption you pay only the current retail fair market value of the vehicle.
- You don’t pay the debt through your regular monthly payments. With redemption you must pay off the vehicle’s value “in full at time of redemption.” In practical terms that means you have to come up with that full amount in one lump sum just a month or two after filing your Chapter 7 case.
See the short Section 722 of the Bankruptcy Code about redemption.
Paying Off the Redemption Amount
This lump sum payoff of the vehicle value is obviously often a problem. If you owe lots more than your vehicle is worth you’d love to save the difference. But even if the value is much less than the debt, coming up with the money may seem impossible. Sometimes it is. Where do people come up with redemption money? Here are three ideas:
- Brainstorm about creative ways to come up with the necessary cash out of your own assets. Do you have anything you can sell or borrow against to raise the cash? Can you get access to any retirement savings, and is doing so worthwhile? Although you should almost always protect any retirement money, tapping into it might be worthwhile if the amount you’d save on the vehicle loan justify doing so. Overall, think outside the box. Don’t immediately assume you don’t have any way to pull together the money.
- Consider asking relatives or friends to lend or even donate to you the money you need for redemption. Explain how this will allow you to keep your necessary transportation for much less money. Offer to make the friend or relative the lienholder on the vehicle after redeeming from your original lender.
- Talk with your bankruptcy lawyer about getting a redemption loan from a financial institution. Certain ones do this specialized kind of financing. You will likely pay a relatively high interest rate, so carefully review the terms with your lawyer. In the right circumstances a redemption loan reduces your monthly payment amount and/or how long you make the payments to make it very worthwhile.