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Keep car in bankruptcy by redeeming loan

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Dear Bankruptcy Adviser,
I have about $100,000 in credit card debt mostly incurred by my ex-husband. We are now divorced, and I have custody of our kids, but we are in a horrible situation — homeless and on food stamps. I fell behind on my car payment about six months ago. I really don’t like to admit we are living in our car; it is our only shelter for the last year. We will be devastated if it gets taken. The car is only worth $3,000, but the balance is more than $7,000. I would like to keep the car and would like to settle for the balance, but I’m afraid to get burned by the lender. I need the car, and I could get family to help me scrape up about $3,000 to keep it.
— Brenda

Dear Brenda,
Reading your story truly is disheartening. I feel great empathy for you, and I do hope your life improves soon. It is hoped I can suggest an option to save the car, pay off a portion of the balance and eliminate the remaining balance.

Bankruptcy code section 722 permits an owner of property secured by a loan to redeem that secured asset. In layman’s terms, this means you can make a lump sum payment and pay off the entire balance for the retail market value of that asset. This option is available for anything from a motor vehicle to a couch or fridge. In your case, you owe $7,000, but the retail value may only be $3,000. You would have to pay that amount to redeem the vehicle and receive the title free and clear.

However, you need to know the current retail value of your car prior to considering this option. The court does not look at the fair market value of the car but more specifically the retail value. This is the value the court uses to determine what you must pay the creditor to redeem the car loan.

There are three levels of car values:

  • Retail value: This is the amount a dealer would sell the car for today.
  • Private party value: This is the amount of a used car that you personally sell.
  • Trade-in value: This is the amount of a used car that you trade in to a dealership as part of a purchase of another car.

Most people, including me, don’t think it’s reasonable you must use the retail value in your motion. After all, no individual can sell a car for the retail value. But that is the judicial interpretation of the law, and it does make redeeming property difficult.

Once you determine the car’s value, you can file the bankruptcy, file the motion to redeem the loan, and then use the $3,000 to pay off that balance owed. You would mail the payment directly to the lender after the judge signs the order approving the motion to redeem.

There is another way to redeem the car loan, and that is by refinancing with a new lender. You likely would not be able to find a lender willing to finance the remaining balance in your situation. This option works best when you have a 3- to 5-year-old car with less than 75,000 miles and a high remaining balance.

Only a few lenders offer redemption services. You can apply to see whether this option is available to you even before you file for bankruptcy, but I hope the first option works for you. You would have to borrow some money to file the bankruptcy case and the motion to redeem, but the numbers still may work out in your favor.

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