Redemption: Keep Your Car, Pay Its Value
Video Transcribed: Hi everybody, Edward Kelly here, your OKC bankruptcy lawyer with another 3 Minutes to Financial Freedom. This is video 2 in the 5 part series. What kinds of debt can I deal with in a bankruptcy and what can I do with it? So, I gave you a summary overview in the first video.
We’ve got secured debts, unsecured debts, hybrids of the same, priority unsecureds, which are treated differently, and administrative debts. And we covered the administrative, which really isn’t much of a factor.
So, let’s talk about the first one. Secured debts. So what does that mean? Well, your car, for example, to the extent of its value, a loan against it is secured. Meaning that the creditor has the security of their collateral. So even if you don’t pay them, they’re secured, feeling secure, to the extent that that car is worth it. Because they can force you to give it back to them through the court. You don’t do so voluntarily.
So, how do you value those? Same with a house. Say you owe $500,000 on your house and your house is worth $250,000. So how much is secured? You guessed it, $250,000. How much is unsecured? $250,000.
Unsecured debts. Medical bills, credit cards, and signature loans. A vast majority of what I see. Old utilities at your old house. Your defunct Verizon accounts from 10 years ago. None of these have collateral tied to them. The creditors extended you those loans without any security. So, in a Chapter 7 liquidation, they are entirely discharged. So they are unsecured debts.
In Chapter 13, as we’ve talked about before, to the extent you are able to pay, you pay. To the extent you can’t afford it, you don’t. It’s not based on what you owe. So let’s say you’re going to pay a total over 3 years of $500 into your Chapter 13. That would never happen, but that’s just for argument’s sake. So, $500 is going to get spread evenly between your unsecured creditors, and whatever else you owe them is gone. So if you owed them $5,500, $500 gets paid, $5,000 gets discharged. That’s your unsecured.
You’re secured, so they’re entitled to the collateral and the remainder is unsecured. So, in a 7, if you want to get rid of a secured debt, you’ve got to give them back the collateral. If you want to get rid of your car note, you’ve got to give the car back.
In a 13, it gets a little more complicated, and we’ll deal with this more in another video. But if you want to keep it, you need to pay in at least the secured value. So let’s say your car’s worth $1,000, but you owe $5,000. You may be able, depending on how recently you bought it, to bifurcate, meaning split that out. $1,000 secured, $4,000 unsecured. Pay that $1,000, and keep the vehicle.
And in fact, in a 7, this is rare because usually, you can’t afford to do it, there’s a process called redemption, where the same thing, say a car’s worth $1,000, you owe $5,000. You can offer to pay $1,000 and keep the car. And if they want to argue about the value, then they can. But if that’s the correct value, then you can redeem it. Because of your unsecured debt, their unsecured portion, they’re out of luck.
So that’s secured and unsecured, your basic garden variety. We’ll be back in the next video talking about priority unsecureds. As always, you can reach me, an Oklahoma debt attorney, at oklahomacitybankruptcyattorney.pro or at (405) 563-7888.