Redemption is a process during a Chapter 7 bankruptcy case where a debtor is able to retain a vehicle by paying the secured creditor the value of the vehicle, not the total debt that is owed. For example, if you owe $15,000 to Ford Motor Credit, but the car securing the debt is only worth $10,000, you can use the redemption process to pay only the value of the vehicle ($10,000), keep the car, and discharge the remaining unsecured debt ($5,000).
Redemption is only available to those debtors who are able to pay the entire value in one lump sum. So in our example above, after the bankruptcy court approves the redemption, Ford Motor credit must receive the entire $10,000. Payments are not allowed. While this may appear to be an insurmountable obstacle, the truth is that there are several financing sources available to you. Some finance companies specialize in providing loans to debtors in bankruptcy, including 722 Redemption Funding and Fresh Start Loan Corporation. Experienced bankruptcy attorneys are very familiar with these companies and other finance sources.
The process for obtaining a redemption auto loan is very similar to qualifying for a traditional loan. Finance companies require a loan application and assurances that you will be able to repay the loan (e.g. steady employment, reasonable debt to income ratio, good payment history, etc). The interest rate can be high for a redemption loan; however the resulting monthly payment is often lower than the original monthly payment.
If you are interested in lowering your monthly payments through the redemption process, discuss your options with your attorney. It is important to carefully consider all of the advantages and disadvantages before making a decision to redeem a vehicle. Some of the advantages of a redemption loan are:
- Retention of the vehicle;
- Vehicle is no longer “upside down;”
- The creditor cannot repossess the vehicle;
- Usually results in a lower monthly payment.
The main disadvantage of a redemption loan is:
- High interest rate
Redemption is not the only option for keeping a vehicle after a bankruptcy. A skilled bankruptcy attorney can explain all of your options and help you obtain the best deal for you and your family.