Redemption of property from the trustee in a chapter 7 bankruptcy
The fresh start you will receive from bankruptcy might not seem so "fresh" if you reaffirm a car loan when you owe substantially more than what the car is worth. It is not uncommon for people have $10,000 or more of negative equity in a vehicle. In cases where the difference is substantial, redemption may be appropriate.
Redemption is the debtor's option to purchase property back from the trustee at market value. If the debtor does not have access to funds from friends or family to purchase the car, there are companies who will fiance the redemption for the debtor. Redemption Loans are sometimes available from local banks or credit unions. Two national companies that offer these loans are:
David Holland Law does not endorse either of these companies, the links are here for your convenience.
Loans for this purpose will typically be at a very high interest rate, 24% is not uncommon. While the rate may be higher than the original loan, there still may be a significant savings depending on the principal reduction. It may be possible to refinance the redemption loan to a lower rate with a credit union or local bank 6 to 12 months after the discharge if you are employed at the time and have used credit appropriately post-discharge. (Learn more about rebuilding credit after a Chapter 7 Bankruptcy)
If after reviewing your specific situation we determine that it is beneficial to you to redeem your vehicle from the trustee, you should apply for a redemption loan immediately. We need an approval for the loan before we file the required motion with the court.
Kelly Blue Book Private Party value is usually safe to use for most common vehicles. In most instances the original creditor will not object to this valuation because it is usually more than what the creditor would realize if the vehicle was surrendered in the bankruptcy. If the vehicle is an antique or "special," valuation problems will likely arise. If the vehicle is damaged or has mechanical issues, and the debtor wants the purchase price to reflect those deficiencies, there also may be problems with valuation. If the original car loan company does not agree with the redemption value, they must file a response to the motion detailing why the value should be higher. The court will then hold a valuation hearing. At this point a professional appraisal may be required, and a decision may have to be made as to whether it is worth it to the debtor to litigate the matter further.
Redemption is mostly used for vehicles, but can be used for any secured personal property the debtor wants to keep in a chapter 7.
The value of personal property for redemption is the price a retail merchant would charge for property of the same age and condition at the time value is determined.