How Georgia’s Pawn Shop Law Excludes Car Title Loans from Chapter 13 Plans

A Chapter 13 bankruptcy allows individuals to restructure their consumer debts and to repay them over an extended period of time. Many debtors choose this form of bankruptcy in order to save a home from foreclosure or a vehicle from repossession. However, not every type of loan can be restructured under Chapter 13.

People in dire financial conditions — especially those with low incomes — might resort to vehicle title loans (also called “title pawns”) that provide relatively large sums of money on a short-term basis. Title lenders operate under Georgia’s pawn shop law. Similar to a hocking of jewelry or other personal items, the title loan contract creates a conditional sale of a vehicle with a right of redemption. The owner buys back the vehicle by repaying the loan and all interest on time. If the borrower defaults, the lender seizes and keeps the vehicle. Since these loans are considered pawn transactions, the state usury laws do not apply. The interest rates that borrowers pay on title loans can exceed 100 percent per year.

Worse still, the way Georgia law treats vehicle title loans means borrowers are not covered by the usual debtor protections in bankruptcy proceedings. Since title to the vehicle is transferred to the lender automatically upon loan default, there is no need for a repossession, for which court permission would be required. Moreover federal courts have ruled that Georgia debtors who are behind on title loans cannot repay them through a Chapter 13 plan. In order for the debtor to redeem the vehicle, the Chapter 13 plan would have to provide for full payment of the loan balance owed, with interest. By contrast, a normal car loan secured by a lien on the vehicle can be “crammed down” in Chapter 13, which means the interest rate and principal balance can be modified and the monthly payment significantly reduced.

The bankruptcy courts have not yet provided uniform or specific guidance for Chapter 13 filers with title loans. A debtor with a loan for which the due date has passed faces a difficult choice. They can either continue making the high monthly payment with exorbitant interest or forfeit the vehicle. Georgia law does allow a 30-day grace period after the maturity date of the loan to redeem the vehicle. If the Chapter 13 is filed within the grace period, a 60-day extension may be available, which can provide more opportunity to negotiate with the lender. A qualified Georgia bankruptcy attorney can analyze your debt situation and counsel you on the optimal course of action.

Jeff Field & Associates represents bankruptcy filers throughout the Atlanta, Marietta and Athens regions of Georgia. If you are struggling with consumer debt, contact us online or call 404-381-1278 for a free initial consultation.