When you’re in debt or need money to pay your bills, taking out a car title loan might seem like a great way to access cash quickly. But if your money troubles get out of hand and you resort to filing for bankruptcy to settle mounting debts, what happens to the vehicle you gave as collateral in exchange for that car title loan?
Depending on whether you are pursuing Chapter 7 or Chapter 13 bankruptcy, it may be possible to include your title loan in a bankruptcy filing and have the loan discharged, or at least restructured to provide higher payments. manageable. But you can also lose your vehicle if you are unable to meet the loan repayment terms. Here are your options.
Title Lending and Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as liquidation. As part of the Chapter 7 filing, unsecured debts can be discharged. This includes credit card debt, medical debt, personal loans, and even promissory notes. As part of the process, your the non-exempt property will be sold and proceeds used to repay creditors.
A title loan, however, is not an unsecured debt; it is secured by your vehicle. When you borrow money through a car title loan, you give the vehicle to the lender as security for that loan. In plain language, you signed the pink slip on your car in exchange for some cash. As a secured loan, a security the loan cannot be discharged in Chapter 7 bankruptcy.
“While state laws vary, generally all secured loans remain in effect,” says Michael Sullivan, personal financial consultant at Take Charge America, a nonprofit credit and financial counseling agency.
Since the loan remains in force, you will either have to pay off the debt in full or work out a manageable payment plan with the lender who holds the title loan. If neither of these options is possible, you can also choose to return the vehicle.
There are also cases in which courts will allow securities loans to be settled through Chapter 7 proceedings, says Lamar Hawkins, a bankruptcy attorney at Guidant Law and chair of the Bankruptcy Law Advisory Commission. Arizona Board of Legal Specialization.
“The bankruptcy court frowns on predatory lending, and title lending is generally predatory,” Hawkins says, adding that in some cases the court will “rewrite the loan at a market rate based on the value of the vehicle, and ask the lender to receive payments on time, so that the borrower can retain the vehicle and retain transportation.
But remember that title lenders are generally aggressive and will repossess a vehicle in the event of default, so be sure to continue making payments before, during, and after your bankruptcy case closes.
Title Loans and Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a restructuring of your debts, and this process includes secured debts such as car title loans, general auto loans, and even mortgages. Under Chapter 13, some unsecured debts can even be forgiven. Those that are not forgiven are reorganized and must be repaid over time.
“Chapter 13 allows you to create a repayment plan where you pay money each month to a trustee. So, at the end of the repayment plan, you’ve paid either the fair market value of the car based on the date the case was filed…or the total owed, whichever is lower,” says the New Jersey bankruptcy attorney Edward Hanratty.
As part of a Chapter 13 filing, you can also reduce the amount of monthly payments you need to make to make them more affordable. Additionally, if the interest rate on the title loan is high, you can also lower the rate through the Chapter 13 process, says Dai Rosenblum, a Pennsylvania bankruptcy attorney.
While there is always a risk of losing your vehicle in Chapter 13 bankruptcy filings, you have many more options for restructuring your debt to prevent this from happening.
Talk to your lawyer about your title loan upfront
When filing for bankruptcy with the help of a lawyer, it is important that you are transparent about all your assets, as well as all your debts and outstanding debts, including your title loan. Not disclosing your title loan will only cause more problems.
“When you file for bankruptcy, you are declaring — under penalty of perjury — that you have listed all assets, including the car, and all debts, including the title loan,” Rosenblum says. “Furthermore, a lawyer cannot solve a problem if he does not know it exists.”
Also, not including all of your debts as part of a bankruptcy case could result in your case being thrown out.
“Or in an extreme case, it could result in jail time for bankruptcy fraud,” says Hanratty. “Prevention is better than cure on this.”
The bottom line
Car title loans can be settled through bankruptcy, but how this type of debt is handled will depend on whether you pursue Chapter 7 or Chapter 13 bankruptcy. Options include debt restructuring, full repayment of the debt or the return of the vehicle to the lender.
Before taking any action, consult a bankruptcy attorney who can help you sort through the options and determine the best course of action.