722 Redemption Loan
What is a 722 redemption loan?
Under 11 U.S.C. §722, a Chapter 7 debtor can keep a financed vehicle by paying the lender a single lump sum equal to the car's current replacement value, not the full loan balance. A 722 redemption loan is specialized financing built to fund that lump sum. It's unrelated to "redeeming" a repossessed car, which is a separate, non-bankruptcy process.
Key takeaways
- Under 11 U.S.C. §722, a Chapter 7 debtor can redeem a financed vehicle by paying the lender one lump sum equal to the car's current replacement value, wiping out the rest of the loan.
- A '722 redemption loan' is a specialized loan product some lenders offer specifically to finance that lump sum, since most debtors don't have it in cash.
- This bankruptcy-code meaning of 'redemption' is completely different from redeeming a repossessed vehicle by paying a lender to get it back — a separate, non-bankruptcy process governed by state law, not §722.
- Redemption under §722 is available only in Chapter 7, is a one-time lump-sum payment, and permanently ends the loan, with no ongoing monthly payment to the original lender afterward.
- Redemption loans, where they exist, are a form of subprime financing themselves and generally carry a high interest rate, since the collateral is a depreciating used vehicle and the borrower is mid-bankruptcy.
What is a 722 redemption loan?
It's financing built to fund a specific bankruptcy option: redeeming a vehicle under 11 U.S.C. §722. In a Chapter 7 case, that section lets a debtor keep a financed car by paying the lender one lump sum equal to the vehicle's current replacement value, not the loan balance and not in installments to the old lender. A 722 redemption loan is how most debtors come up with that lump sum, since few people have it sitting in cash.
Once the redemption payment is made, the original loan and lien are gone. The debtor owns the vehicle outright, subject only to whatever new redemption loan financed the payment.
Why does this word cause so much confusion?
Because "redemption" and "redeem" describe two completely different processes in the car-and-credit world, and sources routinely blur them together.
Bankruptcy redemption (§722) happens inside a Chapter 7 case. The debtor pays the current replacement value in one lump sum and keeps the car, free and clear of the old loan.
Post-repossession redemption happens outside bankruptcy entirely. After a lender repossesses a vehicle, most states give the borrower a window to "redeem" it by paying the full amount owed plus repossession and storage costs, and getting it back before it's sold at auction. See right to cure for how that process compares to curing a default.
These are not the same transaction, they don't happen at the same stage, and they don't cost the same amount. Treat any source that uses "redemption" without specifying which one skeptically.
| Bankruptcy redemption (§722) | Post-repossession redemption | |
|---|---|---|
| Governed by | Federal bankruptcy law | State law |
| Requires an open bankruptcy case | Yes, Chapter 7 | No |
| What you pay | Current replacement value, in one lump sum | Full amount owed, plus repossession and storage costs |
| When it happens | Before or without a repossession | After the vehicle has already been repossessed |
| What you get | Car owned free of the original lien | Car back, loan still in place |
How much does redeeming a car actually cost?
The vehicle's current replacement value, generally what a retail dealer would charge for a comparable car in similar condition, not what's left on the loan. For a loan that's significantly underwater, this can be a large discount off the balance. For a loan close to the car's value, the benefit is smaller.
The debtor and lender can agree on a value, and the bankruptcy court decides if they can't. There's no published formula; it's evidence-based, usually built on standard vehicle-valuation guides.
Is a redemption loan expensive?
Generally, yes. Redemption loans are themselves a form of subprime financing: the borrower is mid-bankruptcy and the collateral is a used, depreciating vehicle. Expect a high rate, in line with other deep-subprime auto financing, and not every market has a lender actively writing these loans. Ask your bankruptcy attorney which redemption lenders, if any, operate where you live.
Argued honestly: redemption isn't free money. It trades one loan for another, smaller one, at a rate that still reflects real risk to the lender. It's worth it specifically when the gap between your old balance and the car's value is large enough that even an expensive new loan beats the old one.
Where redemption fits among your options
Redemption is one of three main paths for keeping, or not keeping, a financed vehicle in Chapter 7: reaffirm the original loan, redeem it under §722, or surrender it. See can I keep my car in Chapter 7 bankruptcy for how the three compare, and car loan after bankruptcy for the fuller picture of financing around a bankruptcy filing.
Common questions
What does 'redeem' mean in Chapter 7 bankruptcy?
It means paying the lender a single lump sum equal to the vehicle's current replacement value, instead of the remaining loan balance. Once paid, the loan is gone and the debtor owns the car free of that lien.
Is a 722 redemption loan the same as redeeming a repossessed car?
No, and confusing the two is common. Section 722 redemption happens in Chapter 7 bankruptcy, before or without a repossession. Redeeming a repossessed vehicle is a separate, state-law process for paying a lender to get a car back after it's already been taken.
Where does the money for a 722 redemption loan come from?
Some specialized lenders offer redemption loans built for this purpose, since most Chapter 7 filers don't have the replacement value in cash. Availability and terms vary, and not every market has an active redemption-loan lender.
How is the car's replacement value determined?
It's generally based on what a retail dealer would charge for a comparable vehicle in similar condition, not a private-party or trade-in figure. The debtor and lender can negotiate it, and the bankruptcy court resolves disputes.
Is redemption better than reaffirming the loan?
It depends how underwater the loan is. Redemption can be a strong option when you owe much more than the car is worth, since you only pay the current value once. See can I keep my car in Chapter 7 for a full comparison of redeem, reaffirm, and surrender.
Sources
- Bankruptcy Basics — Administrative Office of the U.S. Courts