When is Redemption or Surrender Used in a Bankruptcy?

When a debtor files for Chapter 7 bankruptcy, he or she may have the option to retain possession of collateral securing debts through a process known as redemption. Basically, the debtor gets a court order from the bankruptcy trustee (or other judicial oversight proxy) to “redeem” collateral owed to certain creditors for a lump sum payment that's equal to approximately the current market value of the collateral securing the loan.

For instance, let's say that you are leasing a car, and the current market value for your car is approximately $8,000, but you've secured it with a $13,000 loan. If you can come up with the $8,000 necessary to pay off the vehicle's price, your Chapter 7 bankruptcy filing will waive the $5,000 extra you owe on the car, thus allowing you to keep your car, dispatch your obligations legally to your leasing creditor, and save some money in the process.

Redemption cannot be use on all secured loans, and the court can refuse your redemption request based on countervailing arguments put forward by creditors or based on other objections, both legal and practical. Assuming your collateral has not depreciated over time, you may want to weigh the option of “reaffirming” your obligation to the secured creditor -- basically, renewing the terms of your loan agreement so that you can keep the property.

The concept of surrender is simpler. In bankruptcy proceedings, if a debtor no longer wishes to retain the collateral or any obligations to the collateral secured creditor, he or she may simply give up the property to the creditor in exchange for a clean slate. There are cases in which surrender many not be a feasible option for remediating certain debts. If a piece of collateral has depreciated to the point that it's fairly worthless and the debt to the creditor is still rather large, the court may deny request for surrender.

Speak with your bankruptcy attorney, and look at local/state bankruptcy laws to understand the applicability of reaffirmation and surrender agreements as they apply to Chapter 7 or Chapter 13 situation. Bear in mind that the unsecured portion of your collateral loan may not necessarily be erased during bankruptcy proceedings, if the creditor manages to convince the court that the debtor should pay all or some of the unsecured charges. That said, in the vast majority of such cases, the court will allow the debtor the discharge -- after all, the whole concept of bankruptcy as a remedy relies on the possibility of recusing debtors from such aforementioned unsecured obligations.