Robert W. Fong

I have recently filed a Chapter 7 Bankruptcy. I have a car which is with a fair market value of $8,000. I owe $11,000 on it. I like the car and would like to keep it. I have heard about redemption agreements.

Redemption agreements in bankruptcy are governed by 11 U.S.C. section 722 which reads:

”An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.”

As indicated above a Redemption Agreement is an agreement that allows a person (not a business entity) filing for Chapter 7 Bankruptcy to agree to pay a creditor (who has tangible personal property collateral for its loan (usually a car, but it could be furniture, electronic equipment or other collateral) the fair market value of the collateral. The debt must be a debt for goods used primarily for personal, family, or household use (you cannot redeem property that is securing business debts).

When you enter into a redemption agreement you are not paying the amount you owe on the loan but rather you are paying what the collateral is worth.

If you enter into a redemption agreement with your lender then you will have to come up with the full amount of the fair market value to pay off the creditor immediately.

In your case you state that the fair market value of the car is $8,000. Therefore, in order to the redemption, assuming you redeem your car, you would need to pay your lender this amount. You would then own the car free and clear. The remaining portion of the $11,000 which was owed to your lender (or $3,000) would be discharged in your chapter 7 bankruptcy case once you receive your discharge.

If you are in position to raise the $8,000 (perhaps through a parent or a new lender) then you can negotiate a redemption agreement directly with your creditor and file the appropriate documents with the court.

If you cannot agree on an amount with your creditor, but you believe that the collateral is worth less than the amount of the loan and you want to keep the collateral at a lower amount of the loan then you can file a motion with the Bankruptcy Court (Motion For Redemption of Collateral) explaining why you think you are entitled to the redemption agreement at the amount you propose. You may wish to retain counsel to draft the motion and handle the hearing (if necessary) for you.

In certain circumstances there are outside companies which will finance your redemption agreement for you. However, although it could make financial sense, you need to be extremely cautious if you are going to finance a redemption agreement. Generally, these lenders charge very high interest (in the 25% range). You do not want to be indebted to a lender, after you have already filed a bankruptcy, with a loan that carries a 25% rate of interest.

You should also look at these other alternatives in your situation: entering into a reaffirmation agreement with your lender (be very careful as you are creating a new debt which will survive your bankruptcy); surrendering the vehicle to the lender (freeing yourself from the debt); and keeping the vehicle and paying the lender as you did before you filed your bankruptcy (“keep and pay” or “retain and pay”). This last option may or may not be available to you and will depend on the state in which you live. Talk to a Stockton bankruptcy attorney about all of the options. Be aware that there are those who have made their car payments after filing a chapter 7 bankruptcy, believing that they could do “keep and pay”, who still have had their cars repossessed at a later date.

There are deadlines and other bankruptcy rules and requirements involved in the reaffirmation and the redemption process and there also may be additional local forms that are required to be filed.

The decision whether to redeem, reaffirm, surrender or keep and pay on a vehicle must be made on a case-by-case basis as every situation is different.

I foolishly took out a payday loan recently. Times are tough and now I cannot pay the loan back. I know I can discharge my credit cards in a Chapter 7 Bankruptcy. Can I also discharge the payday loans?

The general answer is yes you can discharge the payday loans. In a Chapter 7 Bankruptcy payday loans are treated in a similar manner as other types of unsecured debts like medical bills, credit card bills, or personal loans.

You can discharge the debt even if the payday lender has put a clause in your payday loan agreement that states that you cannot discharge their debt in bankruptcy. (Ignore this clause in your agreement).

However, if you file your Chapter 7 Bankruptcy within a short time of obtaining your payday loan you can be asking for problems in your case. If you have done this then make sure you review your situation with a Stockton bankruptcy attorney. (Basically you can have problems with discharging that debt because the payday lender can argue that you took out your payday loan fraudulently).

The above review applies to California only (payday loan laws can be treated differently in your state). It is by no means inclusive is not intended to provide legal advice. These laws can change and additional laws can apply in your situation. It is highly recommended that you ALWAYS review your situation with a qualified Stockton bankruptcy attorney prior to filing your case.