What is “redemption” in bankruptcy?
- Redemption is an option available to Chapter 7 individual debtor (not corporations or business entities).
- Redemption may allow the debtor to keep personal property (intended for personal, family, or household use) which is acting as collateral for a secured debt.
- The most common example of personal property may be redeemed is an automobile.
- The personal property is redeemed by paying the lienholder the amount of its allowed secured claim in full by one lump sum payment. However, the road to redemption is oftentimes too difficult for debtors to travel because of the lump sum payment requirement.
How does “redemption” work?
Suppose the debtor files for bankruptcy and still owes $20,000 to ABC Bank on her Honda Civic but, the car is now only worth $12,000. In this scenario, ABC Bank has a debt secured by the vehicle up to its value ($12,000) and $8,000 that is essentially unsecured.
During the redemption process, the debtor can generally wipe out the unsecured portion (in this example, $8,000) by paying ABC Bank a lump sum of $12,000. If the debtor chooses redemption and can follow through with payment, the debtor will own the car free and clear once the debtor receives her discharge.
If redemption is not an option, the debtor may be able to keep her Honda Civic by “reaffirming” the debt instead. In that case, the debtor signs a “reaffirmation agreement” with ABC Bank prior to discharge where, the debtor agrees to again become legally obligated to pay all or portion of the entire debt owed by the debtor on the Honda Civic to ABC Bank, essentially excepting the debt from discharge.
Yet another option would be for the debtor to surrender her Honda Civic to ABC Bank. In this case, assuming the debtor receives her discharge, she will no longer by liable for any debt to ABC Bank on the Honda Civic.
The decision whether to surrender, redeem, or reaffirm in bankruptcy is a difficult one and any debtor facing these issues will want to consult an experienced bankruptcy attorney before making any election.
Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.