What is Bankruptcy Redemption?

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There are a myriad of myths and misconceptions when it comes to the matter of personal bankruptcy. One of the most commonly held beliefs is that, by filing for bankruptcy, you will lose everything that you currently own. This myth is enough to keep many people from even considering bankruptcy as a financial option, when it very well might be exactly what they need. Luckily, it isn’t true, and learning more about what you will be able to keep after a bankruptcy can help eradicate this and many other bankruptcy misconceptions.

Taking away everything you own, even if you’re still making payments on it, would negate the benefits of filing for bankruptcy. It doesn’t benefit anyone very much if all of their debts are erased but they’re left homeless and without a car or any other possessions.

The bankruptcy court recognizes this, and therefore have set out policies that state exactly how much home equity will be exempt from liquidation if a person or couple files for bankruptcy. This is known as the Homestead Exemption Policy, and it varies from state to state. New Jersey does not currently have a Homestead Exemption Policy, but if you file for bankruptcy in NJ, you’ll be permitted to use federal bankruptcy exemptions to protect at least some of the value of your home and everything inside it.

Aside from your house, there is, of course, other property that you may wish to keep. Today, we’ll talk about those debts that are secured, like your home, which means you are making payments on an item or property, and that item is collateral. In other words, if you fail to make payments, the creditor can take back the property and sell it. If the creditor is unable to sell the property for the amount you still owe, they can file for deficiency judgment in court, which would require you to pay the difference.

One option that will allow you to keep a piece of secured property during a bankruptcy filing is called Redemption. This practice is possible in Chapter 7 bankruptcies, and involves paying the creditor the current value (or replacement value) of the property as it is now. This value is often less than the amount you still owe, depending on the age and condition of, let’s say, your vehicle.

As long as you are current on your car payments when you file for bankruptcy, you should be able to ‘redeem’ your car for its replacement value. Although this amount is typically lower than what you owe, you’ll have to come up with the entire amount in a lump sum payment.

Additionally, you must come to an agreement with your creditor (the person or company you purchased the car from). If this is impossible, a valuation hearing can be held in court in order to determine an appropriate and fair value.

Property that qualifies for redemption must be personal property (other than real estate) that is not used for business purposes. It also must be tangible and exempt from liquidation. If you aren’t sure whether or not the property you’re interested in saving meets all of the qualifications, run it by your New Jersey bankruptcy attorney before making any decisions.

 

Image credit: Ana_Cotta

 

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