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How Does Redemption in Bankruptcy Work?

Redemption is a bankruptcy process that is often overlooked and under utilized by many Louisville and Southern Indiana bankruptcy bankruptcy filers. Redemption is the process of paying a lump sum to a creditor in a Chapter 7 Bankruptcy in exchange for a release of its lien on some personal property, such as a car or household items. The money paid to the creditor must equal the fair market value of the property that serves as collateral for the loan.

Here is how the process works. Suppose you own a car with that is worth $2,000 but the loan balance on the car is $6,000. If you Reaffirm the note on the car, you will be paying $6,000 plus interest for a car that is only worth $2,000. Would you buy a $2,000 car for $6,000? I doubt it. But that is in effect what you are doing if you reaffirm. The redemption option, on the other hand, would allow you to pay only what the car is worth. But the kicker is that you have to come up with the money in a lump sum. There are, however, companies that will loan you money to pay off the redemption amount, in effect giving you a new loan with a smaller balance.

The way it works is that the debtor files a motion to redeem the property for 2,000. The creditor then has an opportunity to object. The only basis for objecting would be if the creditor believes that the property is worth more than what the debtor is offering to pay. Most of the time the creditor will not object because it would rather have the money than take the car back and have to sell it. So if the creditor does not object, the court will enter an order allowing the debtor to redeem for 2,000 and the debtor then has 10 days to pay the money. Upon payment of the money, the debtor gets a free and clear title to the car.

This process is also very useful where the debtor has put up items of personal property as collateral with very little re-sale value, but that have value to the debtor. In many instances, the debtor may be able to redeem those items for very nominal amounts because the creditor does not want to have to repossess them.

In order to understand your rights, it is important to consult with an experienced Louisville or Southern Indiana Bankruptcy Attorney.

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