Redemption Allows Vehicle Owners to Keep Their Cars Even in Bankruptcy
Vehicle owners have several methods to keep their cars during bankruptcy. Chapter 7 redemption and Chapter 13 "cram downs" can reduce monthly payments and even the total amount owed on the car.
March 20, 2011
Redemption Allows Vehicle Owners to Keep Their Cars Even in BankruptcyA vehicle can be more than just a piece of property you own. It can be the way you get to work, the way your kids get to school or even a statement about who you are as a person. Naturally, people going through bankruptcy are often concerned with keeping their cars. Frequently they are saddled with a larger debt than the car is worth, and paying a high interest rate on the loan in addition.
Redemption is a process in Chapter 7 bankruptcy whereby the debtor brings down the amount owed on his or her vehicle. It works by the debtor paying the fair market value of the car, rather than the loan amount, in one payment. For example, if you owe $12,000 on your auto loan, but the car is now worth only $5,000, you would pay a lump sum of $5,000 and keep your car. The fair market value of the car is assigned by the court.
An obstacle to redemption is the large payment. After all, most people are in bankruptcy because they don't have much cash on hand. However, lenders have arisen in recent years that will loan bankruptcy filers the full payment. This option makes sense for car owners who can significantly reduce the total amount they owe on the car and thereby reduce the monthly payment on the new loan. It is especially advantageous if the borrower can get a rate on the new loan at or lower than they were originally paying.
Chapter 13 Bankruptcy and "Cram Downs"
Cram downs are similar to redemption, but are generally used in Chapter 13 bankruptcy. A cram down will reduce the lender's secured amount on the vehicle to its fair market price, and often reduces the interest rate, usually to 5 percent or less. Unlike redemption, the bankruptcy filer does not need a large up-front payment. However, the lender can still take the car away if the filer can't make the new payments in the future. The unsecured part of the loan is dealt with in the course of Chapter 13 bankruptcy proceedings.
Only discussions with your attorney will let you know whether to file for Chapter 7 or Chapter 13 bankruptcy, or if a redemption or cram down is the right choice for you.
Article provided by The Law Office of Richard S. Davis
Visit us at http://www.richarddavislaw.com