Right of Redemption in Chapter 7

The U.S. Bankruptcy Code allows individual chapter 7 debtors to redeem certain tangible personal property, when such property is intended primarily for personal, family or household use, by paying the secured creditor the allowed amount of the secured claim. Congress created the right of redemption “to protect debtors against ill-advised reaffirmations and the high replacement cost of consumer goods. [The Bankruptcy Code] allows debtors to retain necessary property, such as furniture, clothing, cooking utensils, and other household items, and thereby avoid the high replacement cost that might be required if the secured creditor repossessed the collateral.”

Secured debt

A debt is “secured” if it has an item of property guaranteeing payment, or collateral, of the debt. This means that if the debtor defaults on the debt then the creditor can take the property. Examples of secured debt include mortgages and car loans.  Be aware that unlike Chapter 13 debtors, Chapter 7 debtors must decide what to do with secured debts. Otherwise, debtors will likely probably lose their property.

Valuation and dischargeability

The valuation of such property is based on the replacement value of the property. The definition of replacement value, in this context, is the price a retail merchant would charge for such property considering its age or condition.

The debt secured by the property must be dischargeable to invoke the debtor’s right of redemption. Examples of debt not dischargeable in bankruptcy are certain taxes and alimony and  child support. In theory, the debtor, trustee, or debtor in possession may file a motion to redeem property, though practically only the debtor will bring a motion to redeem because the trustee is unlikely to consider such a motion to be in the best interest of the estate.

Redemption criteria

Chapter 7 debtors can redeem their property when satisfying the following conditions:

1.      The debt is a consumer debt on goods used for personal or household purposes. This excludes property securing business debt or used for business purposes;
2.      The property is personal property, meaning all property other than real estate;
3.      The property is tangible or property that a person can touch. This excludes intangible property such as investments, stocks and bonds, and intellectual property rights;
4.      The property is exempt or the trustee has abandoned the property.

Advantages

Redemption is a good option when the debt is substantially greater than the value of the property. If the debtor redeems the property then the creditor must accept the replacement value of the item as payment in full, despite the debtor owing more on the debt. In other words, it can be a significant tool for reducing debt.

Disadvantages

The main drawback to redemption is coming up with the money to buy the property back. People usually file for bankruptcy due to the lack of case.

To redeem, debtors might look for lenders that specialize in lending to people seeking to redeem property during bankruptcy so it may be possible to secure a loan and get cash. Another option may be to convince the creditor to accept installment payments.

Life can be difficult when falling into debt. If you need a fresh start, contact the law firm of Melanie Tavare, an experienced bankruptcy attorney.