What debts, if any, can be reorganized or modified in a Chapter 7?
In the bankruptcy world, it is a common expression to say that liens (aka, secured debts) survive a Chapter 7 bankruptcy unaffected. For the most part, this is true. In a Chapter 13 which allows a person to restructure secured debts over the term of their plan (e.g., catching up on mortgage arrears, modifying interest rate and term of a car loan). However, these options are just not available in a Chapter 7, especially given that most cases are purely administrative, require no repayment to creditors, and cases are generally open and shut in around 4 months.
There are a few common instances where secured debts can be affected in a Chapter 7: 1) avoidance of judicial or involuntary liens; 2) reaffirmation (usually reaffirmation is on the same terms as the original contract, but it is possible to alter loan terms through reaffirmation); and 3) redemption.
What is §722 Redemption?
The example situation I will be using is as follows:
- Balance on auto loan: $25,000
- Private party value: $10,000
- Retail value: $15,000
The simplest way to put it is that 722 redemption allows a person to keep a vehicle by paying the value of a vehicle, rather than the balance on the loan. For instance, if a car is worth $10,000, but if the balance on the loan is $25,000, 722 redemption would allow for the debtor to “buy back” the car from the lender for $10,000, and the remaining $15,000 on the loan would be discharged. In this scenario where a debtor had the ability to complete redemption, they would exit bankruptcy with a car that is free and clear of all liens.
What are the drawbacks to 722 Redemption?
The major issue with 722 redemption is that that payment needs to be made in a lumpsum pursuant to a court order after filing a motion for to allow for the redemption. This is the primary reason that 722 redemption is not more common. Another reason that it is not more common is the valuation standard that courts use.
What is the valuation standard?
Some courts take the position that the valuation of a vehicle for purposes of 722 redemption is something along the lines of “private party” – i.e., what you might expect to pay if you were to purchase a similar vehicle from someone off of Craigslist or Auto Trader. Other courts take the position that the valuation should be closer to “retail value” – i.e., what you might expect to pay if you were to purchase the same vehicle as-is with no certifications or warranties from a dealership. Retail value is going to be significantly more than private party in every single instance.
In courts that would accept the lower private party standard, redemption makes a lot of sense. You get to keep your vehicle which you know and love and costs and burden of doing so is significantly less than you would be forced to pay if you had surrendered the vehicle and purchased a new one.
In courts that use the retail valuation, there is almost no reason to even consider redemption. If the retail value of your vehicle is $15,000 then the court would require you to pay $15,000 to keep it. But you could also pay that same amount to go to your local dealer and purchase the same exact vehicle which would probably also be in better condition.
The primary source for determining the actual value of either of these standards is Kelly Blue Book or Edmunds and adjusting for specific factors of your actual vehicle that might affect the value, such as mileage and body or mechanical damage.
How can someone afford to redeem a vehicle?
Since most people do not have access to large amounts of cash during their bankruptcy case, the lump sum payment requirement is the primary reason that redemption is not an option. However, it is possible for a different lender to finance that payment which would essentially replace the old loan with a new one with a lower balance and potentially over a longer term. The only lender that comes to mind is 722 Redemption Funding, Inc. While I am usually very anti-creditor, they are my exception to the rule since they have helped out many of my clients without engaging in the unethical behavior which defines the entire creditor industry.
Using the same example above and ignoring additional costs and interest, redemption funding would allow a person to replace their $25,000 loan with a new loan at $10,000 or $15,000 depending on which valuation standard is used. If the old car loan had 36 months left on the term and the new loan has a 60 month term, then the old payment of $694 for 36 months will now be a new payment of $167 or $250 for 60 months, again, depending on which valuation standard is used.
What is the process for 722 Redemption?
To obtain the court order allowing for redemption, you will need to file a motion requesting redemption authorization during your case. That motion will need to set out all of the relevant facts, valuation standard, the terms of redemption, and also giving the lender an opportunity to respond. If the lender does not file a response, the motion can be ruled on without a hearing. If the lender does file a response or the court orders a hearing, a hearing will be held where your attorney and the lender argue for their valuation standard and possibly other factors. The court will then issue an order stating the amount of the redemption payment and that the payment be made in a lump sum to the lender. This order does not require that you actually follow through with the redemption. So if the court uses a higher valuation standard which you do not accept, then you do not need to go through with it and you will be back to where you started with your options being reaffirmation, “ride though”, and surrender.
Redemption in Orange, Riverside, and San Bernardino Counties
Our attorneys are aware of the different positions that the local courts and judges take on redemption motions. By carefully approaching your situation, we can make a compelling argument for using the lowest valuation possible. We also can assist with helping you obtain financing for the redemption if you do not have the ability to make that lump sum payment yourself.
