One of the benefits of filing Chapter 13 bankruptcy is that you can sometimes cram down secured debt on vehicles. This means that you can force a creditor to accept repayment of a loan by paying the value of the vehicle rather than the entire claim. Chapter 7 bankruptcy has a similar tool available to debtors with secured property that has depreciated below the claim amount. Debtors can choose to redeem property by making a single payment to the creditor in an amount equal to the value of the vehicle. For example, if a debtor owns a car worth $5,000 but still owes $15,000 to the creditor holding the note, the debtor can satisfy the entire claim by paying a single payment of $5,000.
There is one limitation on redemption. Debtors who wish to redeem property cannot do so with property belonging to the bankruptcy estate, meaning nonexempt property. For example, if you chose Texas exemptions in your schedules, the money that is in your bank accounts or in the form of stocks and bonds that are not exempt retirement accounts is nonexempt property. Since this property is nonexempt, it is property of the bankruptcy estate and might be used to make payments to your creditors. This money cannot be used to redeem property of the debtor, because it no longer belongs to the debtor.
Redemption has one other obvious problem. Most people that would benefit from redemption do not have enough money to make the single payment to the creditor to redeem their property. Fortunately, there are lenders who specialize in loaning money to debtors who wish to redeem property. These lenders usually offer high interest loans, so the money saved by redeeming the property should be carefully weighed against the interest which will accrue over the life of the loan. For many debtors redemption loans are a good way to restructure debt and save a good deal of money.
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