Redeeming Secured Property in a Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy a debtor can keep secured property by either reaffirming the debt or redeeming the debt. Our Montgomery bankruptcy attorneys believe that redeeming debts are excellent tools to be used in a Chapter 7 case. Redeeming the debt means that the debtor will pay the creditor the replacement value of the property. It's often a good option to redeem the property if you owe substantially more on the loan than the property is worth.
The secured debt is one in which an item of property, which is called collateral, guarantees the payment of the debt. If you default on the debt the creditor can take the property. Examples of this would be one a creditor forecloses on a home or repossesses a car. In a Chapter 7 bankruptcy a debtor must decide what to do with his secured debts. If the debtor is not current on the monthly payments, then that debtor will likely lose the property. If the debtor is current, then the debtor could surrender the property and generally eliminate the debt; however, many times a debtor wants to keep the property which means he must reaffirm the debt or redeem the property.
In a Chapter 7 bankruptcy, when the debtor redeems the property he essentially buys it back from the creditor in one lump sum. The amount that the debtor pays is the replacement value for the property. Replacement value is considered the price that a retail merchant would charge for property of that kind considering the age, condition, and overall value of that property. In most cases replacement value is far less than what the debtor owes on the debt. Many times, the debtor and creditor don't agree on what the replacement value of the property is. When this occurs the bankruptcy court may hold a valuation hearing and decide the question for the parties. If the debtor chooses to redeem the property from the creditor, then once the debtor pays the creditor the replacement value the debtor owns the property free and clear.
In Chapter 7 bankruptcy case a debtor can only redeem property if it meets all the following conditions. First it must be a consumer debt on goods that are used for personal or for household purposes; this excludes debts for business purposes or even cars that are used for business purposes. Second the debt to be redeemed must be for personal property. Personal property is any property other than real estate. Third the debt is tangible; this means you can touch it. We agree that it sounds odd but intangible property cannot be redeemed. Intangible property are things like Investments, stocks and bonds, or intellectual property rights. Finally, the property is either exempt or the trustee has abandoned it because it has little or no equity which can be sold and used for the benefit of the unsecured creditors.
Redeeming debt is often a good option if it's a debt that is substantially greater than the value of the property. In other words, it's best to redeem the debt if you have negative equity. The creditor must accept the replacement value of the item as payment in full even if you owe far more on the debt than the property is worth. There is one main drawback to redeeming a debt. The debtor must come up with a lump sum of money to buy the property back. Many people are unable to come up with a lump sum of money to buy back expensive items such as cars or motorcycles. When this happens, the debtors find themselves reaffirming the property instead of redeeming the property.
At The Sellers Law Firm, we believe in using redemption of debts as a tool to help debtors with their financial problems. Our Montgomery bankruptcy attorneys can help you with the intricacies of bankruptcy. We have offices in Montgomery, Selma, Greenville, and Troy. All consultations are always free, and we can usually see you within 24 hours. Call us at 334-LAWYERS (529-9377) to set an appointment. You may also reach us by using the “text us” link or Contact Form on our website. Remember that doing nothing changes nothing so act today!