At first blush you might wonder if today’s title has a religious theme, or refers to cashing in coupons for valuable prizes. While this post’s thrust does involve deliverance of a sort, it’s not intended as an evangelistic outreach. Instead, this essay focuses on a special provision in Chapter 7 of the Bankruptcy Code:
An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.
What does this passage mean?
I. Translating Section 722 Into Plain English
As we unpack this section of the Code, the first thing to note is that since it is part of Chapter 7, redemption is only available in a Chapter 7 bankruptcy. And it is only available for the “individual debtor” – business debtors need not apply.
Second, the debtor can only redeem “personal property”: real estate is not included within the ambit of this section. The most common example of redemption is when a debtor redeems a motor vehicle.
Third, redemption only makes sense within the context of a secured debt, since a lien is involved.
Fourth, the item to be redeemed must either be exempt property, or have been abandoned by the Chapter 7 Trustee pursuant to 11 U.S.C. § 554.
Fifth, redemption involves “paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.” In other words, to redeem the item the debtor has to pay the claim in full in one big payment: a stream of payments is not permitted.
This last requirement can create a large hurdle because most Chapter 7 debtors are not flush with enough cash to redeem something like a car. However, if a family member or friend is willing to help with a gift, or an interest-free loan, then redemption is viable.
II. The Benefit Of Redemption
If the debtor has to pay the entire balance of the secured debt in one fell swoop, how is that any better than reaffirming the debt?
The key benefit is found in the phrase: “secured by such lien.” This means that if the item to be redeemed is underwater, the claim is secured only up to the value of the item. See 11 U.S.C. § 506 for the Bankruptcy Code’s recipe for determining the secured status of a debt.
For example, suppose you’re a Chapter 7 debtor, and you have a car worth $12,000, but the current balance on the loan is $20,000, i.e., you’re upside-down on your car. (Don’t be surprised by these numbers. This sort of underwater profile happens all of the time.) Then the claim is secured only up to $12,000. This means that you could redeem the car for $12,000 right now, whereas in reaffirmation you’d be looking at monthly payments over time totaling $20,000. In other words, redemption would get rid of $8,000 worth of debt, and you’d get clear title to the car.
Therefore, if you don’t have any family members or friends who are willing or able to help you out, you might consider taking out a loan for $12,000 to redeem the car because the total of the new loan payments could still be less than $20,000 if you could get a loan with a relatively reasonable interest rate.
III. The Mechanics Of Redemption
One of the big goals of bankruptcy law is to ensure that all similarly situated creditors are treated equally and fairly. By its very nature, redemption appears to violate that goal. Therefore, there is a technical nicety, found in Fed. R. Bankr. Proc. 6008, that must be satisfied as part of the process:
On motion by the debtor, trustee, or debtor in possession and after hearing on notice as the court may direct, the court may authorize the redemption of property from a lien or from a sale to enforce a lien in accordance with applicable law.
Thus, you’ll have to get the judge’s permission in order to redeem the item, and this is done by filing a motion to redeem with the Court, and setting it for a hearing.
It shouldn’t come as a surprise to you that you’ll need to attach an exhibit that establishes the fair market value of the item. For example, if the item is a car, you might attach a Kelley Blue Book, or an Edmunds, or a NADA printout as an exhibit.
However, you need to be aware of the fact that the printout by itself is inadmissible hearsay evidence that won’t be considered by the judge. In order to make the printout admissible, you’ll need to include a declaration under penalty of perjury attesting to the accuracy of the printout.
To make sure you don’t goof things up, it’s probably safest to hire a good bankruptcy attorney to do the work for you. It’s generally better to pay a bit to get something done correctly, rather than having to pay a lot more to have an expert do the repair work for you.