Redeeming your car debt in bankruptcy can make sense if the car is worth less than the amount you owe on your car loan. Redemption allows you to pay the lender the value of the car, rather than the larger amount you owe.
In a bankruptcy case, the lender still has the right to expect payment of the value of the vehicle. If you want to keep your car, you have to take some action to keep the lender from getting your car. When you redeem the car in the bankruptcy, you pay the lender either the outstanding balance or the value of the car, whichever is less.
This sounds really good if you don’t owe much on the vehicle or if you owe more than the car is worth, which is true of many loans. But, there’s a big downside to redemption. Generally, you must pay the value to the lender in a lump sum. Most people who file bankruptcy will not have the ready cash necessary to make this happen.
There is, however, an alternative. Over the last several years, specialty lenders have popped up on the Internet offering to finance the redemption amount. These redemption funding companies charge a relatively high interest rate, but the new loan may be worth it if redemption of the original debt saves you money over what you would pay the original lender. It is also worthwhile to contact other lenders, like your credit union or the bank where you keep your deposit accounts, especially if you owed them no money that will be discharged in the bankruptcy.
Redemption is not a rare occurrence, but it is usually not included in the standard fee that a bankruptcy attorney charges. The attorney will probably ask for an additional fee because of the time and paperwork involved in making it happen. If you chose to go through a redemption financing company, many times the new lender will finance the additional attorney’s fee, also
- Compare the value of your car with the amount your lender says you owe. If the value is significantly lower, it might be worth your while to pay off the value or to apply for redemption financing.
- Contact a redemption funding company. You can find several online by searching for “redemption funding” or redemption financing.” Two of the biggest providers are 722Redemption.com and FreshStartLoans.com. You can discuss with them whether it is feasible for you to redeem the vehicle.
- Once you apply for financing, you may have to do some negotiating with the original lender on the value and the condition of your vehicle.
- Once you’ve come to terms with the lender, you or your attorney will prepare and file with the court a Motion to Redeem. Click here for an example of a Motion to Redeem. The redemption must be approved by the bankruptcy judge, but depending on your local procedures, it may not be necessary for you to appear in court.
After filing the Motion to Redeem, make sure you send a copy to your case trustee and to the bank that your current (old) car loan is through, then file a certificate of service to let the court know that you did.
Once the court approves the redemption, the new lender will pay the old lender. The old lender will release the old lien, and you will now be liable to the new lender on your new loan.
Since the new loan was made after you filed bankruptcy, the new loan is not discharged in the bankruptcy case. If you fail to make the payments as agreed, the redemption lender will have all the rights available under its security agreement and under state law to either repossess or force payment.