One of my favorite tools in the Bankruptcy Code is the right of redemption. Redemption, or to redeem property, is the ability to pay the lesser of the value of the property at the time the Bankruptcy is filed or the amount owed on it. So, when you paid $2,500 for a computer two years ago that is now worth $400 but you still owe over $2,000 for it; redemption can be a great deal. I’ve redeemed Palm Pilots ($50), dining room furniture, televisions, cars, mobile homes, travel trailers, all kinds of stuff in Bankruptcy.
Now, obviously there must be a lien on the property or you don’t need to redeem it, you just file the Bankruptcy. If there isn’t a lien on property, then any debt owed is basic unsecured debt; and a bankruptcy filing eliminates that automatically anyway. However, a bankruptcy discharge does not normally affect liens attached to property.
Redemption works best with property that isn’t worth very much. Funding can be a real problem, because you have to pay off the original lender in a lump sum. So, those used Palm Pilots in the ’90’s were easy. Clients paid hundreds for them, racked up huge interest charges; and they could all come up with $50 to never make a payment on the Palm Pilot again.
Bigger ticket items present a different set of problems. So, if you have a mobile home that you paid $70,000 for (I didn’t say my clients were all terribly bright), it flooded recently and has earthquake and hail damage — hey, its been a rough year weather wise; it might be worth considering what it is actually worth NOW in the condition it is in and whether you can come up with a source of funding to pay that amount off. I’ve got a mobile home working now. Granted, the amount owed is down to about $28,000 (in large part due to a seriously spotty payment history). However, the mobile home is worth less than $12,000 — and the client has managed to come up with the $12,000 from a relative.
So, we file the motion, hire an appraiser and get ready to argue value in front of a Judge.
Cars are a little easier, because there are a couple of lenders who will finance the redemption of vehicles. Their interest rates are astronomical, but it can still make a huge difference in the total amount being paid for a vehicle. I think my record on a vehicle was a Chevy pickup worth $12,000 and with a payoff balance of more than $35,000. My clients redeemed it with redemption financing at 28% interest. Their payment went down and their payoff term went down. GMAC was not happy. Oh, well. You can’t please all the people all the time, and GMAC just never seemed to make it onto my list for the day.
Speaking of redemptions, I’ve got a motion to file.