Title pawns have become an ever-growing percentage of consumer debt, as they are marketed as a short-term “quick fix” to a budget deficit. Presumably, these loans will allow the consumer to bridge the gap until payday, at which time the loan will be paid off and title returned. Unfortunately, this is rarely the case, and the loan will be renewed multiple times at an APR of between 120%-155%. It is not uncommon for a bankruptcy attorney to meet with a consumer who has paid the value of the car multiple times over because of the inability to pay off the loan (or “redeem” the pawn).
Title pawns are different from standard vehicle financing in several ways. Because they are a true pawn – where the title to the vehicle is transferred to the creditor – they are exempt from most state usury laws. In addition, every time the loan is renewed, it is subject to different terms. The advantage for the consumer in a pawn transaction is that the creditor does not have the right to seek a deficiency claim in the event that the car is repossessed. So if a consumer owes a title pawn in the amount of $2500, but the vehicle is repossessed and sold for $1000, they will not have to pay the $1500 difference. This protects a consumer who pledged a vehicle which may have become inoperable, or was totaled in a collision.
The main disadvantage for a consumer is that there is no “right of redemption” for a vehicle that has been repossessed by a title pawn lender. In traditional auto financing, the lender is required to provide the borrower with the opportunity to “redeem” a repossessed vehicle within a certain amount of time by paying off the loan balance. After that time period has expired – usually 10 days – the lender can sell the vehicle at either public or private auction. Because there is a transfer of ownership in a title pawn, there is no right to redeem the vehicle after repossession. The title pawn company does not have to provide any opportunity for the borrower to pay off the loan. In addition, the title pawn company can keep any surplus generated by the sale of the repossessed vehicle. So if the title pawn company sells a repossessed car for $2500, and the loan balance was only $1000, they are still permitted to keep the additional amount.
A Chapter 7 bankruptcy does not affect a borrower’s obligations under a title pawn, and it is usually our recommendation to pay off a title pawn prior to the filing of a Chapter 7 case. On the other hand, the title pawn may be paid through a Chapter 13 case, at a reduced rate of interest over a longer time period. But a Chapter 13 bankruptcy cannot force a title pawn lender to return a vehicle that was lawfully repossessed. So if you are facing the repossession of a vehicle that is subject to a title pawn, you should contact a bankruptcy attorney immediately, especially if the vehicle is worth more than the amount owed.