Kentucky Bankruptcy Lawyers Blog

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.

MY CAR HAS BEEN REPOSSESSED. HOW CAN I GET IT BACK?

Everyone knows that if you do not make your car or truck payments, the creditor will send someone out to repossess the vehicle. In most states, including Kentucky and Indiana, the creditor can exercise what is called "self-help." This means that the creditor need not file any type of legal proceeding with a court, but rather, can simply hire some thug to sneak over to your house in the middle of the night, hot wire your car and drive it off. So you could get up in the morning for work and find your car gone. They can even come to your place of employment and swipe your car. The worst part is they don't even have to let you know they're going to do it.

One way to avoid this is to keep your car locked in a garage or keep your eye on it 24 hours a day. The repo guy is forbidden by law from breaking into a locked garage or "breaching the peace." So if you are with your car when he comes to repo it, you can simply tell him to leave, for it is illegal for him to provoke a physical confrontation or take it against your will while you are there trying to prevent it.

Once the creditor has repod your car, it then has the right to sell it at an auction. If the auction doesn't bring enough to cover the debt owed on the auto, which is usually the case, then the creditor can sue you for the difference (the "deficiency balance"). So you may find yourself in the rather unenviable position of having no car but still owing a debt on it. Making it even worse, the damage that the repossession has caused to your credit may make it impossible to finance another car, at least under any reasonable terms.

So, how can bankruptcy help?

If you file a Chapter 7 Bankruptcy, you will not get the vehicle back. What you will accomplish, however, is that you will be able to eliminate the balance still owed on the auto. So whatever the creditor gets at auction will be it. They will not be able to pursue you for that "deficiency balance." That balance will also be erased from your credit report, making it easier for you to finance another vehicle in the future.

If you want the repossessed vehicle back, you will need to file a Chapter 13 Bankruptcy and you will need to file before the auto is sold at auction. If you wait until after it is sold, then it will be too late. In most cases, filing a Chapter 13 Bankruptcy after the repossession but before the re-sale of the auto will allow you to get it back. The reason for this is that by law, until your auto is re-sold you still have an ownership interest in it and the Bankruptcy Code provides that property of yours that has been seized by a creditor prior to Bankruptcy must be returned to you if you file Chapter 13. If the creditor refuses to return the property voluntarily after you have filed, then your attorney can file a Complaint for turnover of the property against the creditor. If the creditor contests the turnover, you may have to convince the Judge that you now have the ability to pay for the automobile through your Chapter 13 plan. You will also have to prove that the vehicle is fully insured.

So, if your automobile has been repossessed, make sure that you immediately contact a qualified, experienced bankruptcy attorney to help you review your options. Remember, time is of the essence in these situations, so you need to act quickly.