When you’re in debt or need money to pay bills, taking a car title loan can seem like a good way to access cash quickly. But if your money troubles become unmanageable and you resort to filing bankruptcy to clear up mounting debts, what happens to the vehicle you signed over as collateral in exchange for that car title loan?
Depending on whether you pursue 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 more manageable payments. But you may also lose your vehicle if you are unable to maintain loan repayment terms. Here are your options.
Title loans and Chapter 7 bankruptcy
Chapter 7 bankruptcy is often referred to as liquidation. As part of 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 nonexempt property will be sold and the proceeds used to pay back 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 sign over the vehicle to the lender as security for that loan. In plain language, you signed over the pink slip to your car in exchange for some money. As a secured loan, a title loan cannot be discharged as part of Chapter 7 bankruptcy.
“Although state laws vary, typically all secured loans remain in force,” says Michael Sullivan, personal financial consultant with Take Charge America, a nonprofit credit and financial counseling agency.
Because the loan remains in force, you will need to either repay the debt in its entirety or work out a manageable payment plan with the lender who holds the title loan. If neither of these options are possible, you can also choose to surrender the vehicle.
There are also instances in which the courts will allow title loans to be addressed as part of Chapter 7 proceedings, says Lamar Hawkins, a bankruptcy attorney with Guidant Law and chair of the Arizona Board of Legal Specialization’s Bankruptcy Law Advisory Commission.
“The bankruptcy court disfavors predatory lending, and title loans are commonly predatory,” says Hawkins, adding that in some cases the court will “rewrite the loan to a market rate based upon the value of the vehicle, and have the lender receive payments over time, so that the borrower can keep the vehicle and keep a means of transportation.”
But remember, title lenders are usually aggressive and will repossess a vehicle upon default, so make sure to continue making the 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 car loans and even mortgages. As part of Chapter 13, some unsecured debts may 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 every month into a trustee. So that at the end of the repayment plan you have paid either the fair market value of the car based on the date the case was filed … or the total owed, whichever is less,” says New Jersey bankruptcy attorney Edward Hanratty.
As part of a Chapter 13 filing, you may also be able to lower the amount of the monthly installment payments you’re required to make in order to make them more affordable. In addition, if the interest rate on the title loan is high, you may also be able to reduce the rate as part of the Chapter 13 process, says Dai Rosenblum, a Pennsylvania bankruptcy attorney.
Though there is still a risk of losing your vehicle as part of Chapter 13 bankruptcy filings, you have far more options available for restructuring your debt in order to prevent that from happening.
Tell your lawyer about your title loan upfront
When pursuing bankruptcy with the assistance of an attorney, it’s important that you are transparent about all of your assets, as well as all of your outstanding debts and liabilities, including your title loan. Not revealing your title loan will only cause more challenges.
“When you file bankruptcy, you state — subject to the criminal penalty of perjury — that you have listed every asset, including the car, and every debt, including the title loan,” says Rosenblum. “Also, a lawyer can’t fix a problem if they don’t know it exists.”
What’s more, not including all of your debts as part of a bankruptcy case could result in dismissal of your case.
“Or in an extreme case, it could result in jail time for bankruptcy fraud,” says Hanratty. “It’s better to be safe than sorry about this.”
The bottom line
Car title loans can be addressed through bankruptcy, but the way this type of debt is handled will depend on whether you’re pursuing Chapter 7 or Chapter 13 bankruptcy. The options include having the debt restructured, paying the debt back entirely or surrendering the vehicle to the lender.
Before you take any action, consult with a bankruptcy attorney who can help you sort through the options and determine the best course of action.