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"Redeeming" your car means that you buy it from the lender. To do this, you must pay the lender the fair market value of the car. You must pay the full amount as a lump sum. As you can imagine, this option is rarely used since most people filing bankruptcy don’t have large amounts of money available to them.
If you can afford it, redeeming your car has significant advantages:
You can save a lot of money. If the fair market value of your car is lower than what you owe, redeeming will allow you to keep the car for less than you would have had to pay otherwise. You will also not have to pay the interest you would have been responsible for if you had continued to make payments over time. This can add up to huge savings!
You can start over fresh without a car loan after bankruptcy. You will still have a car, but you will not have to worry about making payments on it. This can make it much easier to budget and to start saving so that you can stay out of debt.
Redeeming your car does not always make sense, particularly when:
You do not have enough money to redeem it. If the fair market value of the car is more money than you can afford to pay, redeeming your car is probably not an option for you.
The car is a business vehicle. Bankruptcy law only allows you to redeem personal vehicles. If you have a business vehicle, you probably will not be able to redeem it in your bankruptcy.
If you choose to redeem your car, you’ll let the court and the lender know when you fill out your Statement of Intention form in your bankruptcy paperwork. You will also have to file a motion with the court after submitting your initial paperwork. As part of the motion, you will need to provide evidence of the car's value. If the lender objects to your motion, you may have to negotiate and come to an agreement about what the car is worth. If you cannot agree with the lender, you will need to prove that your valuation is more accurate than the lender’s.
If your motion is approved, you will have to pay the lender the redemption value (fair market value) of the car in a lump sum payment. After you pay, the lender will release its claim and you will own the car free and clear.
In general, redeeming your car can be a good option when it is worth significantly more than you owe. It also makes sense when you owe significantly more than it is worth. In both cases, redemption only makes sense when you can afford to pay the redemption price.
What you choose to do with your car in your bankruptcy is entirely up to you, and a choice that made sense for someone else may not make sense for you. We at Upsolve do not recommend any particular way forward, but we hope that this article and others we have written on the topic of secured debt gives you the tools you need to make an informed decision.