How to Redeem Real Property in Chapter 7

by Mike Broemmel
Your personal residence is redeemable in bankruptcy.

Your personal residence is redeemable in bankruptcy.

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If you want to redeem real estate -- that is, gain ownership of it following a bankruptcy proceeding -- you need to pay fair market value for the property and pay off the outstanding loan. You cannot redeem all types of real estate. For example, in a Chapter 7 bankruptcy, you can redeem your primary residence, but not vacant land or buildings used for business purposes. The U.S. Bankruptcy Code establishes a specific procedure to follow when seeking redemption of real estate. Keep in mind the bankruptcy court must approve your requested redemption.

When Redemption Works

If you want to redeem your home, you are likely to receive significant latitude from the court and perhaps even the creditor. Homestead exemption laws, which vary from one state to another, may permit you to keep your home if you can pay for it. Therefore, if you demonstrate the ability to raise enough money to cover a majority of the amount due on the loan -- typically, through alternative financing -- redemption may be possible.

Difficulties of Redemption

For anyone, coming up with the financing necessary to redeem a property might represent a significant challenge, even in the best of times. Raising money becomes significantly more difficult, however, when you find yourself in the midst of a bankruptcy, with an obvious track record for unbalanced finances and even bad debts.

Redemption Loans

If you're a debtor facing bankruptcy, you'll be glad to know that certain lenders specialize in providing redemption loans. These companies will lend you money to pay off the creditor through the bankruptcy court. The redemption lender establishes a new mortgage on the real estate in its favor. Keep in mind that you will likely pay a higher interest rate on a redemption loan than what you paid previously, because the lender is assuming a greater risk by lending you the money and wants to be compensated for that risk. However, this type of financing may be the only option available to you to fund a redemption.

Court Approval

A redemption is not final until approved by the court. The first step is notifying the trustee assigned to your case of your intent to redeem real estate. The trustee lets you know if she approves of the proposed redemption. If the trustee approves, the court will likely follow suit. The trustee is likely to approve if no other creditors object to the proposed redemption and you have demonstrated an ability to raise the money necessary. However, if the trustee opposes the proposed redemption, the court likely will as well. Once the trustee is notified, you can prepare and file a motion with the court. Attach a copy of the actual redemption agreement entered into with the original lender to the motion. The court sets a deadline for creditors to submit an objection to the proposed redemption. Provided no objection occurs and the trustee is on board, the court will typically approve the redemption without a hearing. If objections exist, including any from the trustee, a hearing will be held, at which time you present your arguments in favor of permitting the redemption.