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Title Pawn Loans in Bankruptcy: How Are they Treated?

A title pawn is a transaction where the title to a vehicle is transferred to a pawnbroker in exchange for a loan. The transfer is subject to the borrower’s right to “redeem” the title. Under the Georgia Code, the transaction is treated as a sale with a qualified right of redemption. These terms are set forth in the title pawn contract. A typical pawn agreement will provide that the entire debt is must be repaid in 30 days. If the other party cannot pay the entire loan off (which almost no one ever can) then they can extend the loan another 30 days if they pay a monthly interest payment. In most title pawns, the borrower keeps “rolling over” the balance due by making interest payments, intending eventually to pay off the whole thing when money becomes available. If the borrower defaults, the title pawn broker has the right to repossess the vehicle to satisfy the debt.

Under the Georgia Code, title pawns are not the same as auto loans. Auto loans are “purchase- money” loans used to finance the purchase of a vehicle. As a result, the treatment of a title pawn in bankruptcy is different from the treatment of an auto loan and poses many problems for debtors looking for protection from creditors in a Chapter 13 bankruptcy case. Because title loans are characterized as pawn transactions, they are not subject to state usury laws.

In 2004, Georgia, banned payday loans (where lenders offer high-cost, short-term loans in exchange for putting a lien on a borrower’s future paycheck). However, Georgia still allows title.pawn loans with triple-digit annual interest rates.

Several years ago, a Chapter 13 plan was the perfect way for debtors to pay off a title pawn loan. Instead of paying the standard interest rates which can be up to 150%, bankruptcy debtors could cram the interest rate down to between 5%-7% and retain their cars. In addition, many debtors could pay the balance based on what the vehicle was actually worth, and not what was owed.

Due to several recent court cases, auto title pawn transactions can no longer be redeemed or repaid through a Chapter 13 plan. A debtor with a title pawn now has only three options: 1. They can pay off the loan entirely within their contractual grace period. 2. They can continue to make the monthly interest payment directly and then if the loan is repaid while they are still their plan the plan can be amended to allocate for the “additional money” now available. 3. They can surrender the vehicle back to the title-pawn broker.

If a debtor has already defaulted on the title pawn (meaning that they failed to make the interest payment on time), they are no longer protected from repossession of the vehicle. A typical auto loan lender is required to file a motion for relief from stay to reclaim the property however because the vehicle immediately becomes the property of the title pawn lender upon default, they do not have to request court permission. They can just take the collateral.

If you are starting to have financial problems and have a title pawn loan, understand that bankruptcy will not provide any assistance if you intend to attempt to retain it.

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