What are Secured Debts and Redemption?
We handle many Chapter 7, or “liquidation” bankruptcies at our Queens, New York office. In this kind of bankruptcy, an appointed trustee sells a debtor’s non-exempt assets, with the proceeds going to the client’s creditors. The individual’s debt is then eliminated alltogether or drastically reduced. We tell clients that certain exemptions can protect their assets during Chapter 7 proceedings, and that they can also keep certain secured property by paying the replacement value of it to creditors. This approach is especially helpful for people who owe more on their loans than the current value of their property. In this post we go into more depth about secured debts, redemption, and Chapter 7 bankruptcy. This information can show you how to best get yourself out of debt while keeping as much of your essential assets as possible.
If you have a “secured debt”, this means that the debt is backed by a piece of property to guarantee payment. And if you do not repay the debt or falls behind on payments, the creditor can take that property as collateral for the loan. Some examples of secure debts are car loans and home mortgages. If you decide to go ahead with a Chapter 7 bankruptcy, you can work with a bankruptcy attorney to decide how to handle secured debts. Some people may decide to surrender the property. Or, they may want to keep it by reaffirming the debt, or by redeeming the property. For this to happen, the property needs to be protected by an exemption. There are various federal and state exemptions, and in new York you can decide which set of exemptions best work for your bankruptcy case.
When redeeming property during a Chapter 7 liquidation, you are basically buying back the property from the creditor. There are a few factors to take into account during this procedure. The amount paid is known as the “replacement value” of the property, which is adjusted depending on the age and condition of the property at the time of the redemption. This is usually less than the debt owed, and the creditor may not agree with the replacement value. In that case, the court will hold a hearing to decide the final value, or amount that you owe. Once this amount is paid, you own the property in full, and it is no longer a secured debt.
However, there are some restrictions and disadvantages when it comes to redeeming property in addition to it needing to be “exempt”. The debt must be on goods for personal use and not business purposes. So a car may be a secured debt, but a company car is not. The property must also be tangible. Items such as stocks and investments are not tangible. And a disadvantage to redeeming property is the cost of redemption. If you are already in debt, buying back the property may not be feasible, or good idea.
I often work with clients to decide whether or not redemption during Chapter 7 bankruptcy is the best option; every case is unique. Sometimes the secured debt is larger than the value of the property, so the creditor can accept the replacement value as full payment for the debt, even if it is less than the amount owed.
By explaining secured debts and redemption, we hope that this shows just how many options you have when it comes to handling your debt during a Chapter 7 bankruptcy. A liquidation bankruptcy is not a total loss of your property; it is a way to work with creditors to find a manageable, affordable path towards becoming debt-free.
If you have questions about Chapter 7 bankruptcy and how it can work for you, call the Law Offices of Bruce Feinstein, Esq. today for a Free Consultation.
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