Bankruptcy Code Section 722 authorizes a concept called “redemption." 11 U.S.C § 722 states in pertinent part:
“An individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption."
So basically a 722 redemption means that a debtor can “buy back" the vehicle from the bankruptcy estate for an amount equal to the secured portion of the loan. So for example, if your vehicle is worth $10,000 and you have a $19,000 loan, the secured portion of the loan is $10,000 and the unsecured portion is $9,000. You can therefore redeem, or buyback, the vehicle for $10,000.
One downside to the 722 redemption is that the interest rates are often very high, I’ve heard as high as 26%. So carefully examine the terms of the redemption loan to make sure it is in your best interest. I advise clients to put “pencil to paper" and see if it makes financial sense.
From my experience, clients who own expensive cars that depreciate rapidly are the best candidates for a 722 redemption. For example, if you own a BMW or Mercedes that is only worth $25,000 but you owe $50,000—you might be a good candidate—but again, put a pencil to paper.
Who Can Do a 722 Redemption?
In order to do a 722 redemption you must have filed a Chapter 7 or Chapter 13 bankruptcy. Also, you must have income that totals at least $1,800 a month, whether from employment or some form of retirement. Additionally, your vehicle must meet certain specifications.
What vehicles qualify for a 727 Redemption?
In a Chapter 13 bankruptcy you must have owned the vehicle you are trying to redeem for at least 910 days. In a Chapter 7 bankruptcy there is no such waiting period. However, your vehicle must be a 2003 or newer and have less than 140,000 miles.