Redeeming Secured Property in Chapter 7 Bankruptcy

You might be able to keep financed personal property in Chapter 7 by paying the creditor its value in one lump sum.

You can keep a car, jewelry, or other secured property in Chapter 7 bankruptcy by redeeming it—paying the creditor the actual value of the property. Redemption is often a good option if you owe substantially more on the loan than the property is worth.

Read on to learn about secured property and debts in Chapter 7 bankruptcy, why you might want to redeem property, restrictions on property you can redeem, and the advantages and disadvantages of redemption.

Telling the Court What You Plan to Do With Property Serving as Collateral

When you make a large credit purchase, such as for a car, jewelry, computer, or furniture, the lender usually requires you to put up the purchased property as collateral. This type of debt is known as a secured debt because if you fail to pay, the lender can take back the property, sell it at auction, and use the proceeds to pay down the loan.

In Chapter 7 bankruptcy, when you fill out the official bankruptcy forms, you must tell the court and your creditor what you intend to do with the property securing a debt. For instance, your options include:

  • keep it if you're current and can afford to continue making monthly payments
  • surrender it (give it back to the lender), or
  • redeem it (pay the value in one lump sum payment).

If you aren't current on your payments, you'll probably lose the property because Chapter 7 bankruptcy doesn't provide a way to catch up on arrearages. So unless the lender agrees to negotiate a new agreement (perhaps through a reaffirmation agreement), the lender will be free to pick up the property after your case ends—or sooner if the lender successfully lifts the automatic stay—the order that prevents collection activity.

If you surrender the property, you won't need to worry about paying any portion of the debt. It will get wiped out in your bankruptcy case.

Redeeming (Buying) Property for Less in Chapter 7 Bankruptcy

When you redeem property in Chapter 7 bankruptcy, you buy it back from the creditor in one lump sum for the value of the property. If you and the creditor don't agree on what the value of the property should be, the court will hold a "valuation" hearing and decide the question for you.

If you choose to redeem property and the court approves the redemption, once you pay the creditor the lump sum amount, you own it free and clear.

Restrictions on Redeeming Property

You can redeem property in Chapter 7 bankruptcy only if you meet all of the following conditions:

  • The debt is a consumer debt on goods used for personal or household purposes. You can't use the redemption process to redeem property that secures business debts, such as a car that you use for business purposes.
  • The property is personal property. Personal property is all property other than real estate. You won't be able to redeem your residential home or vacation house.
  • The property is tangible. You must be able to touch the property. Intangible property includes things like investments, stocks and bonds, and intellectual property rights.
  • The property isn't of value in the bankruptcy case. The property must be exempt—you can protect all of the equity with a bankruptcy exemption—or the Chapter 7 trustee appointed to your case has abandoned it because it has little or no value.

Redeeming Secured Property: Advantages and Disadvantages

Redemption is often a good option if your debt balance is substantially greater than the value of the property. If you redeem the property, the creditor must accept the item's value as payment in full, even if you owe much more on the debt.

The main drawback to redemption is coming up with the money. It must be in one lump sum payment. Some companies specialize in lending to people seeking to redeem property; so a loan may be one way to get some cash fast. Or you might be able to get the money from a friend or relative.

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