Last week, I wrote about the bi-monthly cattle call of Pittsburgh bankruptcy lawyers in Judge Bohm’s courtroom for “Reaffirmation Day”. One commenter from my blog post last week mentioned that I hadn’t talked about vehicle redemption as an alternative to reaffirmation.
Simply put, redemption in a Chapter 7 case is a legal strategy to reduce the overall balance on your current car loan to the fair market value of your car. You have the legal right of redemption pursuant to Section 722 of the Bankruptcy Code.
Here’s an example: let’s say that you’re upside-down on your car loan. You owe $19,000 on your loan, but your car only has a fair market value of $12,000. Then you seek financing while in a Chapter 7. Yes, believe it or not, there are lenders out there. The most widely-known is called 722Redemption Lending. They can be found at www.722redemption.com. You might even contact your credit union, if you belong to one.
If your motion is approved by the Court, then the new lender through 722Redemption would pay $12,000 to your old lender, and you wouldn’t owe the remaining $7,000 to the old lender. You would now have a new loan through 722Redemption, albeit with a relatively high interest rate, usually around 22% to 25%.
Redemption is an option that I simply don’t get the opportunity to pursue very often. I hadn’t done a redemption motion in a couple of years, but ironically today, I started to prepare the paperwork on two separate redemption motions. Hmm, I thought that was strange.
Both motions are being prepared for clients who are simply behind on their car payments for various reasons, but who wish to retain their cars. Surprisingly, neither client is upside-down on their car loan. It’s simply that neither lender will work with either client on payment terms. Yes, car lenders can sometimes be unforgiving when it comes to negotiating repayments.
In one case, I am recommending that the car be redeemed for a one-time payment of $500. The current car loan is approximately $3,500. If the lender fights it and wants more than $500, then my client simply wants to walk away from the car, but he would absolutely want the lender to retrieve the car. If this happens, then the $3,500 car loan will be discharged in bankruptcy and my client won’t owe a dime.
Ah yes, perhaps a subject for another day and another blog post, but what happens if you have an older-model car and the lender refuses to repossess? Hint: you’re going to be in a bind, because you can’t take that car to a junk yard without a car title.
If you have questions or comments, please let me know!