What Is Chapter 7 Bankruptcy Vehicle Redemption?

Chapter 7 bankruptcy vehicle redemption

Vehicle redemption is an option for retaining an “underwater” vehicle in Chapter 7 bankruptcy.

More than that, it is an option for retaining a vehicle with a free and clear title—even if you owed more than it was worth when you filed the Chapter 7.

How is this possible? When is vehicle redemption possible in your Metro Detroit Chapter 7 bankruptcy process?

This Article discusses the particulars of this too-little used bankruptcy advantage.

First, some basics regarding vehicles within Chapter 7 bankruptcy and secured debts within the bankruptcy process.


Michigan Chapter 7 Bankruptcy: Asset Liquidation

Vehicle redemption is only possible in Chapter 7 bankruptcy. Not Chapter 13 bankruptcy.

Why?

A Chapter 7 bankruptcy is a liquidation process. That is, in exchange for the benefit of having your debt discharged completely, your assets and property may be liquidated.

This doesn’t happen in every Chapter 7 bankruptcy case in Michigan. It doesn’t even happen in very many Chapter 7 cases.

However, it is always a possibility. Asset liquidation issues are a primary reason why you should never file a Chapter 7 bankruptcy without the assistance of an experienced Livonia, Michigan bankruptcy attorney.

Why is this a danger?

Asset liquidation is the means by which creditors are repaid in Chapter 7 bankruptcy. When you file for a Chapter 7 or Chapter 13 bankruptcy in Metro Detroit (or anywhere else), you create something called the Bankruptcy Estate.

This is a legal estate containing everything that you own or can claim to own as of the date that you file your bankruptcy case.

The Federal Bankruptcy Code and Michigan State law contain provisions known as “exemptions” that allow you to remove certain types of property, up to certain dollar-value caps, from your Bankruptcy Estate.

If property is fully “exempted,” it cannot be seized and liquidated by the Chapter 7 Trustee assigned to your case.

If it cannot be fully exempted, this is a possibility.

Vehicles in Chapter 7 Bankruptcy: Retaining vs. Surrendering

Because a Chapter 7 bankruptcy is a straight liquidation bankruptcy, it leaves only 2 options for your vehicle.

1. Surrendering a Vehicle in Chapter 7 Bankruptcy

Option 1 is to surrender it. Whether you still owe money on your car loan or not, if you no longer wish to retain and keep driving your car or other vehicle, a Chapter 7 bankruptcy will allow you to surrender it.

If you don’t money on it, you’ll surrender it to the Chapter 7 Trustee, who will auction it off, pocket as much of the proceeds as possible under the law, and send whatever is left over to your creditors.

If you do owe money on a car loan, you’ll surrender it back to the creditor holding the lien.

Either way, the vehicle will (eventually—usually!) be towed off, and your associated debt will be entirely discharged in the Chapter 7.

2. Retaining a Vehicle in Chapter 7 Bankruptcy

Alternatively, if you retain a vehicle in Chapter 7 bankruptcy, you keep it as-is.

This is presuming that it doesn’t have equity value, after accounting for lien balances, exceeding the value of the automobile exemption. (Currently, the Federal auto exemption is $4,000.00.)

If your car has more than $4,000 worth of equity after accounting for car loan balances or other lien encumbrances, the Chapter 7 Trustee will seize it and liquidate it for the benefit of your creditors.

Otherwise, if it is “underwater,” the Chapter 7 Trustee will take no interest in it. Instead, you’ll retain the vehicle—and be required to continue making contractual monthly auto loan installment payments.

Unless—vehicle redemption is a viable path.

Chapter 7 Vehicle Redemption: The 3rd Option

Yes! There is a third option! This is vehicle redemption.

Vehicle redemption is available only in Chapter 7 bankruptcy. In Chapter 13 “reorganization” bankruptcies, other options (such as the “cramdown”) are available to modify the terms of secured auto loan contracts.

What is vehicle redemption?

Essentially, when you redeem a vehicle in Chapter 7 bankruptcy, you pay your secured car loan lender the fair market value of the vehicle—and only that amount. When you receive your discharge, that creditor must then release its lien on the title with the Michigan Secretary of State.

You end up owning the car free and clear, having paid for it only what is actually worth.

This is a very valuable tool in the current subprime vehicle loan landscape, needless to say.

Currently, some local Michigan subprime auto loan lenders finance loans for very old used cars at shockingly exorbitant interest rates. These loan terms result in car loan contracts as long as 8 years with annual interest rate percentages in the low-to-high 20s.

Vehicle redemption short circuits the fruit of such predatory lending.

If you owe $25,000 on a car worth only $3,000, the value of a Chapter 7 vehicle redemption can be just as great as the value of the unsecure credit card and other debt you also discharge in the bankruptcy process.

You exit the bankruptcy free of one of the most weighty monthly debt obligations you may have—and still have a means of getting to work the next morning.

In a city like Detroit, with such poor public transportation, reliable transportation is worth its weight in gold.

So how does vehicle redemption actually work? And what are the downside?

How Does Vehicle Redemption Work?

Vehicle redemption does not work simply by checking a box on your bankruptcy petition. To maximize the odds of redeeming a vehicle successfully, you must have an experienced Michigan bankruptcy attorney at your side.

1. Get an Appraisal

First, the Bankruptcy Court will not simply take your word for the vehicle’s value. You must provide evidence of that value.

As noted below, the reason for this is that the vehicle redemption process requires that you engage in adversarial litigation against your vehicle loan lender. You are not simply filing a form to redeem your car in Chapter 7 bankruptcy.

Ideally, you will obtain a written appraisal from an experienced vehicle appraiser. This will be the evidence attached as an exhibit to the Motion to Redeem that you must file.

2. File a Motion

Vehicle redemption in Chapter 7 requires that you file a Motion to Redeem with the Bankruptcy Court. This is an adversarial motion filed against your vehicle loan lender.

If your lender does not respond to the motion within the required timeframe, you will obtain a default judgment allowing the vehicle redemption.

Proceed to Step #4, below, in that case.

If your lender does respond, disagreeing with your valuation or opposing the vehicle redemption on some other basis, proceed to Step #3, below.

3. Fight It Out

If your lender does respond to your Motion to Redeem, the Bankruptcy Court will schedule an evidentiary hearing. An evidentiary hearing is a bench trial. (A bench trial is one in which a judge renders the decision, not a jury.)

The subject of the trial will be the value of your vehicle. If your lender opposes your motion on some other legal basis, the hearing will be as to that allegation instead of valuation, or in addition to valuation.

As with any trial, testimony and evidence will be presented. Your vehicle appraiser may be subpoenaed to appear to provide testimony as to his or her opinion of the vehicle’s condition, his or her experience as an appraiser, and other matters.

Your lender will do the same.

The Bankruptcy Judge will then determine whose evidence and testimony is most creditor and render a decision on that basis.

4. Pay Your Lender

If your lender doesn’t respond to your Motion to Redeem or loses at hearing on the Motion, congratulations! Your vehicle redemption has been successful.

Or has it?

The next step is up to you. You actually have to pay your lender the lump sum value of your vehicle by the deadline date set by the Court in approval of your Motion to Redeem.

It’s all well and good to redeem your vehicle for $5,000 when you owe $20,000 on the loan. However, you still have to have the $5,000 available to pay the lender to finish the redemption.

5. File Another Motion (Maybe)

So you make your vehicle redemption payment and have done all that you are supposed to do. What do you do if your lender then fails to actually lift its lien as required?

This is a violation of a Bankruptcy Court Order, and the lender can be sanctioned for this neglect. If the failure is found to be “willful,” punitive damages may be available.

But what if your Chapter 7 bankruptcy case has now closed?

You’ll need your Michigan lawyer to not only file a motion to reopen your case but also, then, the motion for contempt or sanctions to force the lender to lift its lien afterward.

The Downsides of Vehicle Redemption

What are the downsides of vehicle redemption?

We’ve mentioned a few:

  • The need to find a good vehicle appraiser.
  • The need to draft, file, and properly prosecute an adversarial motion, including a possible evidentiary hearing and trial.
  • The need to pay the lump redemption amount to your vehicle loan lender by a fixed deadline date (fast!).
  • The need to be able to force your lender to comply with the Court’s redemption order when it fails to do so.

Michigan Chapter 7 Bankruptcy Vehicle Redemption: Get the Right Kind of Help

The many-layered vehicle redemption process may be confusing for a non-lawyer trying to save a buck by going it alone without legal assistance. However, it is all in a day’s work for a good Livonia, Michigan bankruptcy lawyer.

Vehicle redemption is an enormously powerful and underused tool in Chapter 7 bankruptcy. However, for the “downside” reasons noted above, it’s not viable in every case. However, to understand whether this is true for you or not, you need to consult an experienced bankruptcy attorney.

Bankruptcy Attorney John Hilla has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Livonia, Detroit, Westland, Southfield, Dearborn, Redford, Farmington, Ann Arbor, Flint, Bay City, and virtually everywhere else in Michigan.

Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is prosecuted properly, competently—and with kindness.

Click the button below to directly schedule your free consultation or contact us at (313) 380-0492.