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TITLE PAWNS AND BANKRUPTCY: NEW CONCERNS FOR DEBTORS TRAPPED IN HIGH INTEREST LOANS

Recently, a Bankruptcy Judge in the Southern District of Georgia has determined that a Debtor in a Chapter 13 bankruptcy  cannot alter the terms of a title pawn transaction through a Chapter 13 repayment plan. A Chapter 13 bankruptcy does allow debtors to modify the terms of secured debts for automobiles and appliances. This can include a reduction in the principal, interest rate and monthly payment. In addition, a Chapter 13 plan can be used to cure the delinquency on a home mortgage. Because a Chapter 13 allows reorganization by changing the terms of secured debts, it is the primary way that delinquent debtors can restructure the payment terms on such debt in order to retain and afford the collateral.

Prior to the recent ruling, a Chapter 13 plan was the ideal way for debtors to pay off a burdensome title pawn loan, with standard interest rates between 130-150%. Because these loans were characterized as pawn transactions, they were not subject to state usury laws. But in a Chapter 13 case, debtors could pay off these title pawns at interest rates as low as 0%. In addition, Debtors could pay the principal based on what the vehicle is worth, and not what is owed. This is no longer the case, as auto pawn transactions cannot be redeemed or rehabilitated through a Chapter 13 plan. Instead, the court has ruled that a debtor with a title pawn is limited to two options with respect to the title pawn loan. The first option is to pay off the loan entirely within the standard 30 day period. The second option under the court’s ruling is to continue to make the monthly interest payments within the recurring 30 day period. So while the terms of other secured debts can be restructured, a title pawn loan is excluded from the debts can be modified.

More problematic is that if the debtor has already defaulted on the title pawn, they are no longer protected from repossession of the vehicle. While other secured lenders have to file a motion and obtain court permission to recover their collateral, a title pawn lender is not subject to those requirements. The logic of the ruling is that when the debtor defaults on the title pawn, the vehicle immediately becomes the property of the title pawn lender. As a result, the lender is not “taking” anything from the debtor, because the debtor no longer owns the car. Needless to say, these loans are even more perilous for cash-strapped consumers who sometimes pay 3-5 times the amount of the original loan before they can obtain their title.

Given that bankruptcy is not going to provide any advantage with respect to the payment terms of a title pawn, the best advice is not to borrow against your title in the first place. If you are forced to obtain such a loan, remember that the monthly payment is only paying interest! You will have to pay extra sums in order to see a reduction in the balance. The best bet is to pay off the loan entirely with some other source of funds, such as an income tax refund, or 401(k) loan. If you meet with a bankruptcy attorney, make sure that you inform them if you have a title pawn (as these transactions are not reported to the credit bureaus) so that they can give you the best possible advice.