Like a cramdown in a Chapter 13 case, your car payments may be able to be reduced with a redemption in a Chapter 7 bankruptcy case. In a redemption, the Debtor pays the lender off with a payment equal to the value of the car. The Debtor is then no longer obligated to pay the lender the remaining balance of the car loan. What a deal! Well, maybe. For a redemption to work, the balance on the car loan needs to be significantly higher than the value of the car. Usually, several thousands of dollars. Most Debtors don't have thousands of dollars lying around. So, they redeem the car by obtaining a redemption loan from a redemption loan company. These are usually higher interest loans. But, if the numbers work, the Debtor can potentially save thousands of dollars over the life of the loan even if paying a higher interest rate because the redemption lowers the principal of the loan.
A redemption is achieved by filing a Motion to Redeem with the bankuptcy court. In the Motion the Debtor proposes a value of the car. If the lender agrees with the value of the car, then the redemption loan company will send payment to the lender and that original lender is now out of the picture. The Debtor will then have a new car loan, but now it will be with the redemption loan company and often with lower payments over a shorter term. If the lender does not agree with the value set forth in the Motion to Redeem, then some negotiations may go on to resolve that issue. If the parties can't agree on the value of the vehicle, then ultimately the bankruptcy judge will decide upon the value of the car. But it rarely gets to that point.
Redemptions have recently become more challenging for Debtors due to the skyrocketing values of used cars. But, used cars seem to be coming back down to earth, and if that trend continues, redemptions could become common again in the future.
Give us a call if you would like to learn more about redemptions and whether one would be beneficial for you.