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I’ve written before here about how terrible payday loans are and title pawns are even worse because they’re as financially onerous but made worse because they often result in hapless consumers losing their much-needed vehicles. And while traditional auto loans may be improved in a Chapter 13 (via a cramdown) or be reaffirmed in a Chapter 7 bankruptcy, a North Carolina title pawn may fast track the loss of your car in bankruptcy. Here’s what you need to know:
Title Pawns are Secured Debt
The nature of debt determines how it’s handled in a bankruptcy, but often I see that people don’t understand the terminology that’s used. A secured debt is one that is tied to a tangible asset like a home (in the case of a mortgage) or a vehicle (in the case of a car loan). Unsecured debts are those like medical bills and credit card debts because your creditors can’t come in and repossess your clothes, shoes or MRI.
In a Chapter 7, unsecured debts are wiped out. In a Chapter 13, many unsecured debts are wiped out as well. In either case, a secured loan like a mortgage or car loan may survive the filing depending on what you owe, your ability to pay it and the amount of equity you have. Title pawns are treated differently though than a regular loan and will likely not be reaffirmed because the judge will put the kibosh on it.
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Title Pawns Won’t Be Reaffirmed
I will tell you that it’s rare that a title pawn would survive a bankruptcy - only if you are completely current on payments and continuing them won't put your financial future at risk. The whole idea of a bankruptcy is to get you a fresh start and get your debts under control. This is a terrible financial arrangement that can make it difficult for you to meet your monthly payment obligations under a Chapter 13 or to service your secured debt (such as your mortgage) that survives a Chapter 7 filing.
The expected outcome is that if you head into a bankruptcy with a title pawn, you are very likely to lose your vehicle. How can you avoid this? You can try and sell the car and then pay off the title pawn loan with the proceeds. If you can’t sell it for enough to cover your debt, this won’t work because there is a lien on your title and it won’t transfer to the buyer until the loan is paid off in full. Otherwise, expect the judge to tell you to surrender it.
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What Happens if the Judge Makes You Surrender the Vehicle?
You could owe more on the loan than the vehicle is worth – for instance if you have a $1,500 car and you took out a $1,200 loan it may have ballooned to $2,500 from exorbitant interest, late fees and penalties. If the judge orders you to surrender the vehicle and they sell it for $1,500 - that leaves you with a $1,000 loan balance. This amount will be written off as unsecured debt in the bankruptcy. Granted, you will lose your car, but you will also lose a debt that has no doubt been plaguing you.
And here’s a word of advice – if you are thinking of leaving your North Carolina title pawn off of your bankruptcy filing, I do NOT recommend this. Although it likely won’t appear on your credit report so your Trustee may not know about it at first, if they found out, you are in danger of having your entire bankruptcy thrown out. It’s just not worth it. It’s best to take advantage of the fresh start your bankruptcy offers, save up your spare cash and buy a cheap used car to see you through and say adios to payday loans and title pawns forever – they are one of the worst financial transactions you can engage in!
If you are drowning in debt and are considering bankruptcy, call a reputable North Carolina bankruptcy attorney like John T Orcutt for advice on your financial situation including any auto title pawns you may have. Appointments are available at a location convenient to you. Contact us for a free consultation to see if a well-timed Chapter 7 or Chapter 13 bankruptcy can help you.