Can You File Bankruptcy on a Title Loan?

If you’re struggling with debt and have a title loan, you may wonder if bankruptcy can help you escape that burden. Title loans, secured by the borrower’s vehicle, often come with high interest rates and the risk of losing your car if you can’t make the payments. Understanding how bankruptcy affects a title loan can be crucial for making informed financial decisions.

Types of Bankruptcy: Chapter 7 and Chapter 13

In the United States, individuals typically file for either Chapter 7 or Chapter 13 bankruptcy. Each type of bankruptcy treats secured debts, like title loans, differently.

Chapter 7 Bankruptcy

Also known as “liquidation” bankruptcy, Chapter 7 can discharge many unsecured debts, but secured debts like title loans are more complex.

When you file for Chapter 7, an automatic stay is issued, temporarily halting all collection activities, including repossession of your vehicle.

However, because the title loan is secured by your car, the lender can request relief from the automatic stay to repossess the vehicle.

To keep the car, you typically must reaffirm the debt, meaning you agree to continue making payments under the original loan terms. If you don’t, the lender can repossess the car even after the bankruptcy is completed.

Chapter 13 Bankruptcy

Chapter 13, or “reorganization” bankruptcy, allows you to keep your assets while creating a repayment plan to pay off debts over three to five years.

Under Chapter 13, you can include your title loan in the repayment plan. This can reduce the monthly payment by stretching it over a longer period or lowering the interest rate.

The automatic stay in Chapter 13 also prevents the lender from repossessing your car, as long as you adhere to the repayment plan approved by the bankruptcy court. If you complete the repayment plan successfully, any remaining debt on the title loan can be discharged.

Reaffirmation Agreements and Redemption

Two other options can come into play when dealing with a title loan in bankruptcy:

Reaffirmation Agreement

In a reaffirmation agreement, you agree to continue paying the loan under its original terms despite the bankruptcy. This can be risky if you’re struggling financially since failing to make payments can lead to repossession.

Redemption

Redemption allows you to pay a lump sum to the lender, which is often the current market value of the vehicle, instead of the remaining loan balance. This can be beneficial if your car is worth less than what you owe on the loan, but it requires you to have the cash, or redemption loan, available to make the payment.

Redemption loans help finance the redemption process when you do not have the available cash to pay the redemption amount in a lump sum. These loans usually come with a high interest rate, but can be helpful in removing sometimes thousands in negative equity on your car loan.

Considerations and Next Steps

Filing for bankruptcy is a significant decision that can have long-term financial and legal implications. Here are some important considerations:

• Consult an attorney: Bankruptcy laws are complex, and the treatment of secured debts like title loans can vary based on individual circumstances and jurisdiction. Speaking with a bankruptcy attorney can provide clarity on your options and help you navigate the process effectively.
• Evaluate your financial situation: Understand all aspects of your financial situation before deciding on bankruptcy. This includes assessing your debts, assets, income, and expenses.
• Long-term impact: Consider the long-term impact of bankruptcy on your credit and future borrowing ability. While it can provide relief from overwhelming debt, it also stays on your credit report for up to 10 years.

Bankruptcy can provide a way to manage or discharge a title loan, but the specifics depend on the type of bankruptcy and your circumstances. Consulting with a bankruptcy attorney is crucial to understanding your options and making the best decision for your financial future. To speak to someone about your title loan or to learn more about bankruptcy, contact the Law Offices of Robert M. Geller to schedule a free consultation with an experienced attorney.