Keep your car and saving money on it in a Chapter 7 case through Redemption

By NJ Lawyer, Bruce C. Truesdale, Esq.

If you have a financed car and you are filing a Chapter 7 bankruptcy case, you have three ways in which you can deal with your car loan. If want to be done with the car and your obligations on the car, you can “surrender” the car. You will return the car to the finance company and your obligation to pay for the car will be discharged on the successful completion of your bankruptcy case. If you want to keep the car and continue to make payments on the car under the current financing arrangement, you can submit a reaffirmation agreement. You are telling the finance company that you will keep the car and continue to make payments on the car pursuant to your original contract terms. OR, you can “redeem” the car; the subject of this short article.

Redemption is an infrequently used option in dealing with a financed vehicle in a Chapter 7 bankruptcy case. If you redeem your vehicle, you must pay the lender the actual current value of the vehicle in full. The steps you must take to redeem the vehicle are as follows: You will propose to pay the lender the value of the car; negotiate an agreed upon value of the car (or a motion to have the Judge assigned to your case decide the value may have to be made in the alternative); pay to the lender the agreed upon value by a date certain (we’ll get to how you get the money to do that below).

How do you determine the value of your car? The value of your vehicle for the purpose of redemption will be the amount that you and the lender agree it is. But the basis for arriving at this value is determining the “retail value” of your car based upon its, make, model, mileage, year, options and condition. Valuation guides such as the Black Book, NADA Guide and Kelly Blue Book can be used to determine the value of your vehicle based upon its make, model, year, mileage and condition. Generally, these guides provide a basis for arriving at an agreement as to the value of your vehicle. If agreement cannot be reached, a more expensive alternative is a professional appraisal of the vehicle and/or a motion to determine value before the Judge assigned to your case.

A motion to allow the redemption of your vehicle must be made in your case. Once granted, you must pay the value of the car in full in a single payment by the time set forth in the Court’s Order. Once your discharge is entered in your Chapter 7 case, the lender must release it’s lien and you own the car free and clear of the earlier lien.

Redeeming a car can save you a huge sum of money if you are paying much more than the car is worth, which is often the case. It’s not unusual for the retail value to be half as much as the principal amount that you are paying interest on to your finance company. In addition, you have eliminated your monthly car payment.

If you do not have the money on hand necessary to redeem the vehicle, there are companies out that there that will lend you the money to redeem the vehicle. You are in fact trading one loan for another and the interest rate for the new loan will be high, however the savings may come from the fact that you are now financing a much lower principal amount than you were prior to the redemption.

Your attorney (or you) will have to “run the numbers” to see what kind of savings a redemption of your vehicle may provide you.