What Happens If I Have Pawned Property and File For Bankruptcy?

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In a Nutshell

Pawn transactions are almost always the last option for individuals seeking cash, as pawn contracts do not favor the borrower. They favor the pawnshop or title loan company. If you’re thinking about filing for bankruptcy, read on to learn more about how pawn shops work, what a title loan is, and what happens to these transactions in a bankruptcy case.

Written by the Upsolve Team.  Reviewed by Attorney Andrea Wimmer
Updated July 28, 2020


With COVID-19 creating even more financial stress than Americans are already struggling to navigate, many consumers are searching for quick ways to get cash, like taking property to a pawn shop or working with a TitleMax company. If you’re thinking about filing for bankruptcy, read on to learn more about how pawn shops work, what a title loan is, and what happens to these transactions in a bankruptcy case.

How Do Pawn Shops Work?

A pawn shop either allows individuals to sell them their possessions outright or it temporarily loans money to consumers after taking something of value from customers as security or collateral. When you give your property to a pawn shop dealer, this is called pawning an item. Typical property that is frequently pawned includes jewelry and family heirlooms. Other items people often pawn include stereo equipment, power tools, cameras, computers, antiques, and televisions. If you have not sold them your property outright, the pawn shop dealer holds the item until you are able to redeem the item by paying back the loan. This is called the right of redemption.  A pawn shop is often the last resort before filing bankruptcy. 

Pawn shop transactions are most commonly pursued under extreme financial duress when the consumer feels like they have run out of other options. Pawnbrokers knows this and can and will take advantage of you. Pawn shops make their money in charging very high-interest rates before they’ll return property to owners and loaning a percentage of the property’s value rather than its full value. 

Moreover, pawn shops usually give you only a few months to repay the loan and some pawn shops can ask for repayment within 30 days or they will opt to sell your property. Therefore, if you are unable to repay the money within the timeframe, you will lose your property because the pawn shop  is permitted to keep it as payment in full per the terms of your collateral-based loan.

What Is Title Pawn?

You probably have seen TitleMax signs in your community saying you can get cash in 30 minutes with bad credit. Titlemax is headquartered in the state of Georgia and has hundreds of storefronts across the United States. With TitleMax, you use the title to your car, motorcycle, or other eligible titled property as security or collateral for a loan. You keep your property when dealing with TitleMax, but they take possession of your title. In a title loan transaction, you borrow money based on the value of your vehicle or other titled property. If you use a vehicle as collateral, the TitleMax company will also probably take possession of a key to that vehicle. However, in some title pawn transactions, the company will keep your titled property until you repay the loan amount. If you are considering title pawn as an option, you should check state law in your area as many states have started to bar these types of transactions. However, some of these title pawn and TitleMax agencies have gone online in an attempt to get around these state regulations. Before you take your car title out of the file cabinet, think long and hard about using your car title as collateral. Like pawn shops, title loan and title pawn companies offer payment plan loans with very high-interest rates that are nearly impossible to pay back. If you don’t pay the loan back, the TitleMax or title pawn company can keep the title to your property or even keep your property if they are holding it as repayment for your loan.  

Redemption of Pawned Property

If you are one of the fortunate few who pays a pawn loan back in full within the time specified by your loan terms, you do have legal rights that protect you. You have the right of redemption. This right is governed by state law and basically means that if the pawn loan or title loan is paid in full within a certain period of time, the property will be released back to you. This right of redemption is usually outlined in the pawn contract you sign when you enter into a loan agreement. Unfortunately, most pawn transactions end with the person losing their pawned property because the interest rates are very high and paying the loan back is nearly impossible within the time frame allowed. 

What Happens to Pawned Property When I File Bankruptcy?

Are you someone who has already pawned property or has entered into a title pawn and is now considering filing bankruptcy? The Bankruptcy Code requires that all debts and assets are listed in an individual’s bankruptcy petition. Whether you are required to disclose a pawn shop or title pawn transaction during bankruptcy depends on when the pawn transaction was made.  

Bankruptcy Estate

The Bankruptcy Code requires you to list all the property and assets you own and any assets you have a right to when you file for bankruptcy relief. This becomes your bankruptcy estate. As you must list any property you have a right to, even if it isn’t in your possession, you must list any property currently being held at a pawn shop or title pawn agency that you can still redeem or have returned to you. This pawned property is also part of your bankruptcy estate and is subject to the protections of the automatic stay that apply to all of your creditors, including pawn shops and companies like TitleMax. This means they cannot sell your pawned property while the bankruptcy case remains active because it’s part of your bankruptcy estate.  

Limits to the Automatic Stay in Pawn Transactions

There are limits to the automatic stay that you should be aware of. Specifically, the automatic stay does not “toll” or pause your right of redemption period in your pawn contract. It does, however, extend the right of redemption for a 60 day period plus whatever time was left on your loan contract redemption period. For example, if there were 2 days left in your pawn contract for you to pay the remainder of your loan and redeem the pawned property, the automatic stay will grant you  62 days to redeem your property. Keep in mind that the automatic stay (which prevents the pawn dealer from selling your property) cannot last longer than this period of time, even if your bankruptcy petition remains active for years, as typically happens with a Chapter 13 bankruptcy. Note that if your right of redemption period has passed at the time you file for bankruptcy, there is no automatic stay as to your pawned property. All you can do in the bankruptcy is discharge the pawn debt, which means that if you have entered into a title pawn agreement with  TitleMax, for example, you may lose your property unless you can repay the full balance of the loan. It is therefore probably wise to contact a bankruptcy lawyer and schedule a free consultation for legal advice regarding your right of redemption for your pawned property if you’re filing for bankruptcy and are concerned about retaining ownership of that pawned property.  

Secured Debt

Pawn loans are classified as secured debt in a bankruptcy case because you used your car, jewelry, electronics, or other items as collateral to secure or obtain the loan. If you fail to repay the loan, the pawnbroker can sell the property to recoup the money they loaned you. A TitleMax company can use repossession to legally take your car or motorcycle or other titled property if you default on your loan payments. 

Discharge of Pawn Loans

Pawn loans are eligible for discharge in a Chapter 7 bankruptcy case which means they can be eliminated if your bankruptcy petition is approved. However, the discharge does not mean that you get the property back. The property can only be returned if you repay the debt to the pawnshop or TitleMax company. Essentially, filing for bankruptcy buys you some additional time to try and repay the pawn loan to prevent your property from being sold.

Conclusion

Pawn transactions are almost always the last option for individuals seeking cash, as pawn contracts do not favor the borrower. They favor the pawnshop or title loan company. If you enter into a pawn transaction you will get less money than your property is worth and your interest rates on the loans will be very high, so you may wind up with more debt than before you pawned your property or turned over the title to your property. Even if you ultimately decide to file bankruptcy, which can help resolve the pawn debt, there are still limits to redeeming your property within this process. When you consider all these factors, pawning your property comes with a lot of risks, which are best avoided when possible.   



About the authors
The Upsolve Team

Upsolve is lucky to have an incredible team of finance and consumer rights professionals as contributing writers to help us keep our content up to date, informative, and helpful for everyone.

Attorney Andrea Wimmer

Andrea practiced exclusively as debtors’ counsel in consumer chapter 7 and 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team full time in August 2019. While in private practice, Andrea handled all ban... read more

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