A “redemption” is provided for under Section 722 of the Bankruptcy Code and is available for Chapter 7 debtors. That provision allows an individual debtor to retain personal property when that property has been used to secure a debt. The debtor must pay the fair market value of the item to the creditor. That fair market value determines to what extent the creditor is secured. The second choice is to pay the amount of the secured creditor’s debt. The third choice is to sign a reaffirmation agreement and continue to be legally obligated on the debt again. The last choice is to surrender the item to the secured creditor. Under Section 722, a debtor may be able to get the lien released for far less than what he owes. So, for example, if you owe a creditor $10,000 on a car and the fair market value of the car is $5,000, the Bankruptcy Code allows you to pay you $5,000 to redeem the car. That amount must be paid in one lump sum to that creditor. If the creditor agrees with the value, then either the debtor or the creditor has to submit a stipulated order of redemption. If the creditor does not agree with the value, then the debtor has to file a motion for redemption, and a hearing will be set with the judge deciding what the value of the item is. There are deadlines involved in the redemption process. The debtor has to have the money to redeem the item and be able to pay the creditor, with many debtors turning to family members and friends. There are also financial institutions that offer financing in such situations.
Redemption should be considered as an option in Chapter 7, if you own a vehicle that is worth thousands of dollars less than the debt on the vehicle – in other words, you are upside down on the vehicle. It should also be considered if the debtor is behind on payments or has a spotty payment history. In Western New York, Judge Ninfo has ruled that the standard for determining the value of a motor vehicle to be redeemed under Section 722 is its wholesale value. See In re Barse. You and your lawyer should carefully examine redemption as option if there is a significant disparity between the amount owed and the property’s fair market value.
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