How To Redeem Your Car in Bankruptcy and Save Thousands

Redemption works best when you owe more than your car is worth. You pay the vehicle’s retail value instead of the full loan balance. The catch? You need to pay in one lump sum.

What Car Redemption Means in Bankruptcy

Redeeming your car in bankruptcy differs from state redemption rights. Under state law, redemption means paying the entire loan balance. You must cover late fees, interest, and repossession costs.

Bankruptcy redemption lets you pay the car’s value instead. If the trustee liquidated your car, your lender would only get auction price. Section 722 of the Bankruptcy Code creates this right.

Why Redemption Helps You Save Money

You save big when you’re upside down on your loan. You won’t pay the full balance or interest on that amount.

The difference between value and loan balance gets discharged in bankruptcy. You won’t owe that money anymore.

Unlike reaffirmation agreements, you don’t need current payments. You can redeem even when you’re behind.

The Challenges of Car Redemption

You must pay the car’s full value upfront. Most Chapter 7 filers don’t have that much cash available.

Redemption lenders offer specialized loans for this purpose. You borrow money for the lump sum, then repay over time. You’re essentially refinancing with a lower principal amount.

Watch out for high interest rates from redemption lenders. Your new rate might exceed your old one. You could still save money if the principal drops enough.

Use a loan calculator to verify savings. Enter your current balance, rate, and term. Compare that with the new loan numbers.

Avoid predatory lenders with balloon payments or hidden fees. Check with your bank or credit union first. They might offer better terms than specialty lenders.

Most bankruptcy lawyers charge extra for redemption work. You’ll pay additional fees for paperwork and hearings. Your attorney may need to negotiate if the lender disputes value.

Step-by-Step Car Redemption Process

1. Find Your Car’s Market Value

Use NADA, Kelley Blue Book, or Edmunds online calculators. Print your results as evidence for court.

2. Calculate Your Total Loan Amount

Add principal balance, past-due amounts, and accrued interest. Include late fees, repossession costs, and finance charges. Redemption makes sense when this total exceeds your car’s value significantly.

3. Secure Funding for the Lump Sum

Search online for “redemption funding” or “redemption financing” companies. Contact multiple lenders to compare offers. Verify the deal saves you money using a calculator.

4. File Your Motion to Redeem

Prepare a Motion to Redeem for the bankruptcy court. The Indiana bankruptcy court provides an example. Your local court may have specific forms. Attach your car valuation as an exhibit.

5. Notify Your Lender and Trustee

Send copies to your original lender and bankruptcy trustee. File a certificate of service with the court.

6. Negotiate If Needed

Your creditor may dispute your car’s value. They might file an objection to your motion. You can usually reach agreement on condition and value outside court.

7. Get Court Approval

The bankruptcy judge must approve your motion. You may not need to appear in person. After approval, pay the agreed value within 10-30 days.

8. Complete the Lien Transfer

Your original lender releases its lien on your car. They transfer the lien to your new lender.

You must repay the new lender per your agreement. The redemption loan isn’t included in bankruptcy discharge. Your new lender can repossess if you default.

Redemption Eligibility Requirements

Bankruptcy law limits when you can redeem property. All these conditions must be met:

• Consumer debt only: The car must serve personal, family, or household purposes. Business vehicles don’t qualify for redemption.
• Personal property only: Redemption applies to cars, furniture, and household goods. You can’t redeem real estate like homes or cabins.
• Tangible property only: The property must be physical and touchable. Stocks, investments, and intellectual property don’t qualify.
• Exempt or abandoned property: All equity must be covered by exemption. The trustee must have abandoned the car as worthless.

Example: Your car is worth $6,000 and you owe $12,000. Your state exemption covers the full $6,000 equity. You can redeem by paying $6,000 instead of $12,000.

Your Chapter 7 Car Options Compared

Your choices depend on car value, loan balance, and payment status. You have three main options:

Reaffirmation

You and your lender agree to continue as before. The court must approve the reaffirmation agreement.

You keep your car and make regular payments. Your lender can repossess if you default later. You must be current on payments to reaffirm.

Surrender

You voluntarily return the car to your lender. You won’t owe any remaining balance. Choose this option when payments are unaffordable or you’re behind.

Redemption

You pay only the car’s current value. The remaining balance gets discharged. You need lump-sum payment or redemption financing.

These options only exist in Chapter 7 bankruptcy. Chapter 13 offers different solutions for car loans.

Leased vehicles follow separate rules. Redemption doesn’t apply to car leases or lease-to-own agreements.

Getting Professional Bankruptcy Guidance

Car redemption involves court procedures and lender negotiations. You’ll need accurate valuations and proper documentation. A bankruptcy attorney helps you navigate these requirements.

You can speak with a bankruptcy attorney for free to discuss your situation. They’ll evaluate whether redemption makes financial sense. An attorney handles the motion, negotiations, and court approval.

Calculate potential savings before committing to redemption. Compare your current loan terms with redemption financing offers. Factor in attorney fees and lender costs.

Redemption works best when you’re significantly underwater on your loan. You might save thousands in principal and interest. The key is securing affordable financing for the lump sum.