Washington Bankruptcy Lawyer - Bankruptcy Attorney

What does it mean "to redeem collateral"?

Some creditors may have liens on certain property. The lien holder has a special right to sell that property on which it has a lien, known as "collateral," and use the proceeds to satisfy its claim. The property "secures" the debt, so the lien holder is said to have a "secured claim." Generally, bankruptcy leaves a creditor's lien in place. This means that, despite the bankruptcy filing, the creditor can sell the collateral to satisfy its claim.

The Bankruptcy Code allows a debtor to "redeem" collateral. An individual debtor can keep certain kinds of collateral--tangible, personal property intended primarily for personal, family, or household use--by paying the holder of a lien on the property the amount of its "allowed secured claim," which typically means the lesser of the amount owed or the value of the property. Without the option to redeem, a debtor could not keep the collateral without first entering into a reaffirmation agreement and becoming legally obligated again on the entire debt, even though it may exceed the value of the collateral. The option to redeem applies only to property that a debtor has claimed as exempt or that the trustee has abandoned. With redemption, a debtor can often get liens released on personal household possessions for less than the underlying debt on those secured possessions. Unless the creditor consents to payments over time, a debtor must generally pay the redemption amount in one lump-sum payment to the creditor.

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