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What is “redemption” in bankruptcy?

  • Redemption is an option available to Chapter 7 individual debtor (not corporations or business entities).
  • Redemption may allow the debtor to keep personal property (intended for personal, family, or household use) which is acting as collateral for a secured debt.
  • The most common example of personal property may be redeemed is an automobile.
  • The personal property is redeemed by paying the lienholder the amount of its allowed secured claim in full by one lump sum payment.  However, the road to redemption is oftentimes too difficult for debtors to travel because of the lump sum payment requirement.

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How does “redemption” work?

Suppose the debtor files for bankruptcy and still owes $20,000 to ABC Bank on her Honda Civic but, the car is now only worth $12,000.  In this scenario, ABC Bank has a debt secured by the vehicle up to its value ($12,000) and $8,000 that is essentially unsecured.

During the redemption process, the debtor can generally wipe out the unsecured portion (in this example, $8,000) by paying ABC Bank a lump sum of $12,000.  If the debtor chooses redemption and can follow through with payment, the debtor will own the car free and clear once the debtor receives her discharge.

If redemption is not an option, the debtor may be able to keep her Honda Civic by “reaffirming” the debt instead.  In that case, the debtor signs a “reaffirmation agreement” with ABC Bank prior to discharge where, the debtor agrees to again become legally obligated to pay all or portion of the entire debt owed by the debtor on the Honda Civic to ABC Bank, essentially excepting the debt from discharge.

Yet another option would be for the debtor to surrender her Honda Civic to ABC Bank.  In this case, assuming the debtor receives her discharge, she will no longer by liable for any debt to ABC Bank on the Honda Civic.

The decision whether to surrender, redeem, or reaffirm in bankruptcy is a difficult one and any debtor facing these issues will want to consult an experienced bankruptcy attorney before making any election.


  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

 

Florida’s Second District Court of Appeal recently addressed an interesting question concerning whether Florida’s Consumer Collection Practices Act applies to an action seeking a deficiency decree. In the situation presented, the appellate court answered the question in the negative.

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In Dyck O’Neal, Inc. v. Kami Ward, Fla. 2d DCA Case No. 2D15-2989 (Fla. 2nd DCA Jan. 27, 2017), the 2nd DCA was presented with the issue of whether compliance with Fla. Stat. § 559.715, a provision of Florida’s Consumer Collection Practices Act (“FCCPA”) that requires written notice of assignment of a consumer debt at least 30 days before any action to collect that debt, is required in a deficiency action following a foreclosure judgment. Specifically, after a final judgment of foreclosure was entered against Ms. Ward and the property was sold at auction for $100, the judgment was assigned to Dyck O’Neal, Inc., which then filed a deficiency action against Ms. Ward. Ms. Ward defended by arguing that she had not received notice of the assignment at least 30 days before the deficiency action was filed. The trial court agreed and granted summary judgment in her favor.

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The appellate court reversed, finding that FCCPA (Fla. Stat. §§ 559.55 – 559.785) did not apply because a deficiency action is not an action to collect a consumer debt on a note, but rather an action to obtain a monetary judgment on a foreclosure judgment.

Because a deficiency action is not an action to collect consumer debt, section 559.715’s [notice] requirement … does not apply.

The Second District’s opinion provides guidance to lenders as to the applicability of FCCPA to deficiency actions and precludes the assertion of this defense in such cases.

 

In my May 26th post, I raised several questions that unsecured creditors in any Chapter 11 case should know the answers to and take action where appropriate.  One of those questions is “Am I entitled to priority payment?”  This is also important to answer in a Chapter 7 case.

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Your delinquent customer told you not to worry, you were first in line for payment, and that payment would be coming soon.  Next thing you know, your customer has filed a bankruptcy and you have not been paid.  As discussed in my June 24th post, you obtain a proof of claim form and are prepared to fill it out and file it before the deadline, but then you get to the last question, number 12 – “Is all or part of the claim entitled to priority under 11 U.S.C. § 507(a)?”

Your first impulse is to check “yes” – of course you are entitled to priority – the debtor told you that you were first place, a VIP for payment.

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NOT so fast…most creditors’ claims are “general” unsecured claims, and not entitled to priority treatment.  Take a breath and ask yourself, does my claim fit into any of the following categories:

  • domestic & child support obligation;
  • salary, wages, or benefits owed to an employee;
  • deposit of less than $2,850.00 towards the purchase, lease, or rental of property or services for personal, family, or household use;
  • claim for contribution to an employee benefit plan;
  • claim of grain farmer or fisherman relating to storage and processing facility;
  • certain unsecured taxes or penalties owed to the government;
  • claim for death or personal injury resulting from operation of a motor vehicle or vessel by an intoxicated debtor;
  • customs duty arising out of the importation of merchandise; or
  • claim based on commitment by the debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured deposition institution.

If you fall into one of these categories, GREAT, but chances are that you DO NOT!  Resist the urge to check “other”!  Check the “No” box, sign the bottom of the form and send it in.

Feeling angry and/or depressed?  If your customer is in Chapter 11, you may want to consider joining a support group – perhaps the “Official Committee of Unsecured Creditors” – fondly referred to as the OCC or GUCCs.  I’ll be back to discuss that in a future blog post!


Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.