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File Bankruptcy — But Keep Your Car for Much Less Than You Owe

The following article was submitted by Attorney Steven Elmer from 722Redemption.com to help people learn how it may be possible to keep their car or truck after bankruptcy for far less than the current amount owed.


In Chapter 7 bankruptcy, debtors have three main options regarding financed personal property items. They can surrender, reaffirm, or redeem the item.

When choosing to surrender, the debtor typically needs only inform the creditor to arrange a pick-up of the financed item. The bankruptcy should absolve the debtor from owing a deficiency on the surrendered item to the creditor. When reaffirming, the creditor will typically send the debtor a “reaffirmation agreement” requiring the debtor to continue paying for the financed item. Typically, the “reaffirmation agreement” involves the same terms of the contract as before filing.

The third option was created by § 722 of the bankruptcy code. Under § 722: “An individual debtor may…redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt…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.” Basically, a debtor can redeem the financed item by paying a lump sum equal to the fair market value of the item to the current creditor. See also § 506.

As a practice example, let’s say Debtor X owes Finance Co. $20,000 for an automobile. The fair market value of that automobile is $10,000. Debtor X can “redeem” the automobile in a chapter 7 bankruptcy by paying Finance Co. the fair market value of the vehicle, which is the $10,000. Debtor X is no longer liable for the remaining balance of the loan. If Debtor X had chose to reaffirm on the debt, Debtor X would be liable to Finance Co. for the $20,000.

Unfortunately, most debtors cannot afford the lump sum necessary to pay off the previous creditor, which bars them from the redemption option. As a result, redemption companies have popped up who provide the lump sum necessary to redeem the vehicle under §722. These companies provide the debtor with the tools to make the goals of §722 a practical reality. The debtor can keep his or her vehicle for the fair market value by financing the payoff of their previous loan through the use of a redemption company.

722 Redemption Funding, Inc. is a redemption company created to help debtors gain the benefits allowed by §722. It has been in business for close to 20 years and is well-regarded by the consumer bankruptcy attorney field. It has worked with attorneys to set the case-law and help debtors save substantial money through the redemption process.

Bankruptcy Attorney Guidance on Process

Preliminary Matter:
–§ 1325 applies only to Chapter 13s==910 Day rule is inapplicable in Chapter 7s

Debtor’s Options Re: Financed Vehicles

  1. Surrender
  2. Reaffirm
  3. Redeem
  4. Retain and Pay (“Ride Through” option)
    • In Re Dumont 383 B.R. 481 (9th Cir. 2008)– “Perhaps most telling on this issue is the fact that every available bankruptcy court decision has concluded that the fourth option or the ‘ride through’ option was eliminated by these amendments in BAPCPA to the Code.” 
    • Is Ipso Facto Clause Enforceable?

Who Qualifies:
-Chapter 7 Debtor that has a personal property item secured by a lien

  • personal property only, not real property
  • typically underwater or cross-collateralized
  • and able to pay a lump sum for the fair-market value of the collateral

Why Redeem:

  • Lower payment and often a shorter term
  • Behind on payments
  • If debtor chooses to trade the vehicle in down the road, they typically owe closer to what the vehicle is worth
File Bankruptcy    But Keep Your Car for Much Less Than You Owe

11 § 722 Redemption
An individual debtor may…redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt…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.

The Specific Statutory Prerequisites are:

  1. an individual debtor;
  2. tangible consumer goods securing dischargeable consumer debt;
  3. property that has either been claimed as exempt by the debtor or was abandoned by the trustee.

What Determines the Proper Valuation of the Collateral

  • Look to § 506—Determination of Secured Status
  • 506(a)(1)
    –“the claim is a secured claim to the extent of the value…in such property”
    –“Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property”

  • 506(a)(2)
    –“such value…shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing”
    -“Replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.”

Pre-BAPCPA 506 Interpretations—“Whole-Sale” or “Liquidation Value”

  • 506(a)(2) was not in existence so courts relied on 506(a)(1)
    –“Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property”

  • In Re: Perez, 318 B.R. 742 (Bankr.M.D.Fla.2005)
    –“A redemption is the functional equivalent of a surrender of the automobile followed by a public liquidation auction at which the debtor appears, bids at the auction, and purchase the automobile for its liquidation value as determined by the market place-a foreclosure sale-on the date of the sale.”

Post-BAPCPA 506(a)(2) “Retail Value”

  • 506(a)(2) added under BAPCPA
    -“replacement value for property acquired for personal, family, or household use is defined as ‘the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.’” In Re: Morales, 387 B.R. 36 (Bankr.CD.CAL 2008).

  • The Code still failed to “articulate a specific method for calculating the retail value.” Id.

Post-BAPCPA 506(a)(2) “Retail Value” Cont.
In determining the “replacement value” of an automobile under 11 U.S.C. § 506(a)(2), the retail value of an identical make and model car is the starting point with certain expenses, including mileage, reconditioning and the retail cost of repairs, as allowable deductions.

Post-BAPCPA 506(a)(2) “Retail Value” Cont.

  • In Re: Morales, 387 B.R. 36 (Bankr.CD.CAL 2008)
    -The retail value of vehicles “should be calculated by adjusting the KBB or NADA Guide Retail Value by a Reasonable Amount Based on Evidence Presented Regarding the Vehicle’s Condition and Other Relevant Factors”
    –Look at the price a retail merchant would charge not a private party
    –the retail value better approximates a price that includes the “costs of sale and market”

  • So start with the retail price based upon KBB, NADA, or Edmunds
    –But Remember: The Code’s def. of retail includes an adjustment for age and condition, while KBB’s defines retail as the price for a vehicle that is in excellent condition. In Re: Morales, 387 B.R. 36 (Bankr.CD.CAL 2008)

Post-BAPCPA 506(a)(2) “Retail Value” Cont.

  • In Re: Morales, 387 B.R. 36 (Bankr.CD.CAL 2008)
    –the Debtor has the burden of proving the reasonableness of any deviation from the retail value guides.
    –Evidence in support of an adjustment of the guide may include declarations, testimony, vehicle advertisements, expert appraisal reports and private party values
    –Often provided by the redemption lender

Post-BAPCPA 506(a)(2) “Retail Value” Cont.

  • Many Courts further recognize that NADA or the KBB estimates reflect vehicles that are “showroom” ready
  • These valuations include certain expenditures, which are necessary to bring the car up to retail price, thus the prices used by retailers are inflated
    – In Re: Ortiz, No. 06-16243-BKRBR (Bankr.S.D.Fla.Fed.27 2007)
    –Start with retail value and subtract out the retail costs of repairs
    –In Re: Gehring, No. 11-60611 (Bankr.N.D.OH 2011)
    –Retail price is the starting point and certain expenses, including reconditioning, must be factored into the calculation.

Valuation Date Under §506(a)(2)

  • The first sentence of (a)(2) states the replacement value should be calculated “as of the date of the filing of the petition”
  • The second sentence states that “replacement value shall mean the price a retail merchant would charge…at the time the value is determined”
  • In Re: Morales, 387 B.R. 36 (Bankr.CD.CAL 2008)
    –Value calculated as of the petition date, not the hearing date.

Valuation Summary

  1. KBB or NADA retail value
  2. Determine vehicle’s condition at the petition date
    • Take into account the retail cost of repairs and reconditioning
    • Look at declarations, testimony, vehicle advertisements, expert appraisal reports and private party values
  3. Determine the reasonable adjustment to the KBB or NADA value

Attorney Fees

  • Attorneys can charge for contested matters (fees are typically determined in the initial retainer with the debtor)
  • There is no conflict of interest. “The interests here do not conflict; they coincide.” In Re: Ray, 314 B.R. 643 (Bankr.M.D.Tenn 2004).
  • Remember to charge the rate in your retainer agreement
  • Debtor can often agree to pay or release the attorney’s fees as part of their redemption
    –typically up to $600.00

  • File supplemental 2016(b)

Sample Motions

  • Typically provided by the lender
  • Should include:
    1. Year
    2. Model
    3. Trim
    4. Options
    5. Mileage
    6. Condition—attach Exhibits
    7. Basis, e.g. inspection or third party report

Practice Tips

  • Double check there are no other lienholders
  • Prepare yourself for objections
    –don’t just rely on the documents provided by lenders, but look at the market
    –usually always some room for settlement
    –less than 90% result in contested hearings

  • Double check that you have the correct creditor and address for service

Lenders

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