How Pawn Shop Loans Are Treated in Chapter 13 Bankruptcy
The pawn business is booming. But pawnbrokers don’t just do business with the working poor. Instead, middle- and upper-income borrowers are taking their valuables to pawn shops to generate the cash needed for mortgage payments, car loans, school tuition, and even basics like food and clothing. Pawn industry trade magazines have taken notice of this trend and more and more pawnbrokers are opening locations in high-end malls. Specialty pawn shops now look more like jewelry stores than merchandising pawn shops and openly solicit wealthy customers. In Atlanta, there is a pawn shop called “The Happy Hocker” that specializes in jewelry and watches and advertises itself as the “pawn shop for the rich and famous.”
Bankruptcy attorneys are also looking at these wealthy borrowers. While the 2005 changes to the nation’s bankruptcy laws generally require wealthy debtors to file Chapter 13, there has been a steady increase in the number of bankruptcy filings from families with household incomes of $100,000 or more. Not surprisingly, many of these high-income bankruptcy filers have pledged to pawn collectibles, jewelry, electronics, watches, and family heirlooms in an effort to raise cash. Scared, embarrassed, and unsure about exactly how pawnbrokers work, these pawnbrokers unnecessarily risk their property if they aren’t vigilant about timelines and predetermined dispositions.
In most cases, the greatest risk to a pawn borrower arises from the default provisions of the pawn loan. Generally, in the event of default, title to the pledged collateral is transferred to the pawnbroker. Therefore, in general, if a borrower is considering filing for bankruptcy, he should file his case before the security loan is in default and/or before the title actually passes.
Although bankruptcy laws are federal laws and apply in all states, pawnbroking laws vary from state to state. In general, a bankruptcy court will look to local laws to determine when a pawn loan is in default. Local laws will also set the rules for what a borrower must do to keep their pawn loan out of default; This usually means offering an interest payment.
In most states, a Chapter 13 filing while the pawn transaction is still in effect will preserve the debtor’s ownership of the property. The automatic stay in bankruptcy will prevent the pawnbroker from selling the property and the Chapter 13 plan will give the borrower the opportunity to pay off the pawn loan as a secured debt. The borrower may not take possession of his property right away, but at least he knows the property is safe.
Conversely, Chapter 13 may not be of much help once the title has passed. In this situation, the pawned merchandise does not become part of the debtor’s bankruptcy estate and therefore the loan is not included in the plan. There are some arguments a smart attorney can use to return pawned property to the bankruptcy estate, but this process is an uphill battle.
As a rule, therefore, pawn borrowers should try to file their Chapter 13 cases before their pawn transactions go into default. At a minimum, the pawn borrower should seek legal advice prior to default to learn more about applicable state law and local bankruptcy procedures dealing with pawn loans.