What Is Bankruptcy Redemption?

Learn about when you can pay your creditor the replacement value of your car or other property in bankruptcy.

When filing for bankruptcy, many people wonder if they can keep their car or some other property that they’re still making payments on. In most cases, the answer is yes.

In fact, bankruptcy provides several ways that a debtor (the bankruptcy filer) can keep property that’s serving as collateral for a secured debt. (Unlike unsecured debt, if you don’t pay back a secured debt, the lender has the right to sell the purchased property—such as a house, car, or equipment—and use the funds to pay down the debt.)

One of the options, called redemption, allows the filer to pay the lender the replacement value of the property. This option works well if the property is worth less than what the debtor currently owes. There are some restrictions, however, as follows:

  • the debt must be a consumer debt, not a business debt
  • the property can’t be real estate
  • the property must be tangible (not intangible property, such as stock or publishing rights)
  • the filer must be able to protect (exempt) all of the equity in the property, and
  • the filer must pay the lender must in one lump sum payment.

Although this can be a good way to go, it isn’t used often because most bankruptcy filers don’t have sufficient cash to cover the replacement value of the property.

(Learn more in Redeeming Secured Property in Chapter 7 Bankruptcy.)

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