Reducing Mortgages and Car Loans during Bankruptcy

Filing bankruptcy eliminates unsecured debt and can even eliminate personal responsibility for secured debts (i.e car loans and mortgages) but it cannot eliminate liens. In other words, it generally doesn't stop a lender, who you have signed an agreement with pledging your car or house as collateral (i.e. mortgages and car loans), from selling your car or house to pay its debt.

However, there are ways to eliminate these liens in bankruptcy. For example, if your home is worth less than the payoff of your first mortgage, you can "strip off" second or third mortgages in a Chapter 13 bankruptcy case. Another option that debtors have is ability to "redeem" or pay the creditor the value of your car, instead of the payoff of your car loan, in a chapter 7 case. The downside to this route is that a debtor must now borrow or come up with all the money to pay off the value of the car at once. One company, 722 Redemption, specializes in loans of this type or "redemption loans." A similar redemption in a Chapter 13 bankruptcy case allows you to "redeem" your vehicle but only when the right circumstances exist. If you are eligible for redemption in a Chapter 13 bankruptcy case, you have up to 60 months to pay the vehicle value.

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