Redemption is paying back your creditor the actual value of the property in full. This way you get to keep your property without having to surrender it. You should go for redemption if you owe your creditor more loan than the actual value of the property.
Explaining the court what you will do with the Collateral Property
When you file for bankruptcy under chapter 7, you have to mention in your bankruptcy form your intent on dealing with your collateral property. Whenever you purchase an asset or property, the creditor takes a lien on your property, so that if you fail to pay, they can foreclose or sell off the property to redeem their money. This type of debt against collateral is known as secured debt.
There are 3 ways you can deal with it –
- If you are current on your payments, then you can continue to pay the loan amount and keep the property with you
- If you cannot make timely payments, you will need to surrender the property (Give it back)
- Redeem it – here you can negotiate and pay 1 lump sum amount to close the debt instead of doing part payments
However, if your payments have been due since a long time, you will not be able to avail of the above and will have to lose the property. Since, unlike chapter 13, chapter 7 does not help you out by letting you pay your arrears over a period of time. Therefore, unless the lender is willing to make a new agreement with payment deeds (reaffirmation agreement), he can take possession of your property.
Although if you surrender your property, you don’t have to worry about paying any debt.
Redeeming the Property
When you decide to redeem the property, you decide to pay a lump sum amount to the creditor to get your property free from them. It is nothing but buying back your property (of which they held a value in terms of a Lien/Collateral) from the creditor and holding no dues on it.
The redemption amount can be decided between the creditor and you, however, if there is any conflict in the decision, the court can conduct a “Valuation Hearing” and help make the decision for you.
Restrictions on Redemption
You can go ahead with redeeming your property if you meet all these criteria-
- The debt owed is for personal purposes only – You cannot redeem a property that is used for business purposes eg Car that you use for business. Redemption is only possible for property used for household or personal reasons.
- Personal Property does not include Real Estate – Here, personal property can mean any asset excluding real estate property. Therefore, you cannot get your vacation home redeemed.
- The property must be tangible – Tangible property is something that you can touch like your car. Stocks, investments, bonds, intellectual properties, and the likes cannot be redeemed.
Pros and Cons of Redemption
Redemption is a great option especially when the loan amount is much more than the actual value of the property. Since, once you decide on the redemption value, you will pay the lump sum amount to the creditor irrespective of the actual amount owed by you.
However, the biggest disadvantage is arranging the money in a lump sum. The best option of course would be to loan it from friends or relatives. Alternatively, you can loan the amount from companies that lend money to people looking to redeem their properties.
It is important that you consult with an attorney before you go ahead with any proceeding in bankruptcy because a first-hand experience comes very handed in any matter pertaining to the court.