Last updated Sept. 29, 2017.
Car title loans are generally a last resort for borrowers. You know the interest and fees will be high, but you’re out of options. Car title lenders generally won’t do a credit check or otherwise inquire into your ability to pay. They’ll give you the cash on the same day. It’s a tempting offer. Of course, car title loans generally put you further in debt rather than help you climb out of it.
So, what happens to your car title loan when you file for bankruptcy?
What is a car title loan?
A car title loan is a short-term loan secured by your car. You can typically only get a title loan if you own the car free and clear. You’ll have to take in your title and a copy of your key and leave it as security. You’ll also have to pay certain fees. Then the lender will give you cash and you’ll have a set period of time, usually 30 days, to repay it. If you can’t pay after 30 days, your lender will give you the option of rolling over your loan for a fee so that you have another 30 days to pay. If you default on the loan, and the lender has correctly perfected their security interest, the title lender can repossess your vehicle. You’ll be liable for the repossession fees, too.
Car title lending is particularly hard on borrowers. One study found that in 2012, the most recent year for which data is available, U.S. consumers borrowed a total of $1.6 billion in car title loans. For those loans, they paid $3.6 billion in interest. One in six title loan borrowers had their cars repossessed. The average individual loan was for $950, rolled over eight times, and had total interest over the course of the loan of $2,142. That makes for an APR of about 300%.
Car title lenders win either way. If you keep your car and pay back the loan, they make a fortune in interest. They’ll only lend you an average of 26% of the value of your car, so they make money if they repossess and sell it, too.
What happens to my car title loan in bankruptcy?
The answer depends on the type of bankruptcy you choose to file.
Chapter 7 Bankruptcy and Car Title Loans
In Chapter 7 bankruptcy, you’ll surrender your non-exempt assets to the bankruptcy trustee. In California, you can choose between two different sets of exemptions. Remember that exemptions only apply to the equity you hold in an asset and are used to determine whether or not the trustee can sell the asset. They do not affect secured debts.
The trustee will sell your nonexempt assets and pay the proceeds to your unsecured creditors. At the end of the process, your remaining unsecured debt will be discharged. However, a title loan is a secured debt.
Under Chapter 7, you have the option to “redeem” a secured debt. That’s the only way to keep your car through the bankruptcy. To redeem title loan debt, you’ll have to pay the market value of the car in one lump sum. For example, say your car is worth $4,000 but you owe $6,000 to the title lending company. You can pay $4,000 in bankruptcy and the rest of the debt will be discharged. However, it’s difficult for most debtors to put together enough cash to redeem the debt. There are, however, companies that specialize in funding redemptions, and your attorney can discuss these with you.
You may instead choose to “reaffirm” your debt. When you reaffirm a debt, you agree to continue to be bound by that debt throughout and after your bankruptcy. You’ll continue to make your regular monthly payments on that debt until you’ve paid it off. However, a reaffirmed debt cannot be discharged in a future bankruptcy. If you reaffirm, you’re stuck with that debt until you pay it.
If you can’t redeem the debt, consider selling the car before you file for bankruptcy and using the proceeds to repay the title loan debt. If your car isn’t worth enough to sell, you can surrender it to the title loan company. Either way, you’ll lose your car. Without bankruptcy, the title lending company would be able to sue you for the deficiency between what you owed and what they got for the car at auction. After your bankruptcy discharge, you won’t be liable for any deficiency.
If you receive your bankruptcy discharge without addressing your title loan debt, the lender will repossess your car as soon as your bankruptcy ends. If they sell it and the proceeds are less than your debt, you’ll be liable for the deficiency.
Chapter 13 Bankruptcy and Car Title Loans
Under Chapter 13, you have more flexibility to deal with a car title loan. When you file for Chapter 13 bankruptcy, you work with the bankruptcy trustee and the court to come up with a payment plan that lasts for three to five years. You can deal with the title loan through your payment plan.
As under Chapter 7, you can keep your car if you pay its market value. Chapter 13 allows you to spread that payment out over the life of your plan rather than paying it all at once.
You’re much more likely to be able to keep your car under Chapter 13 than Chapter 7.
How can I keep my car without filing bankruptcy?
The best way to make sure you keep your car is to avoid car title lending. You need your car to get to work, take your kids to the doctor, and pick up groceries. Title lending is intended to trap you and force you deeper and deeper into debt. It’s just like payday lending, but much less carefully regulated by law. Because title loans are secured loans, they are not discharged in bankruptcy.
Don’t use a credit card or other form of unsecured debt to pay off your title loan in an attempt to convert your secured debt to unsecured debt. The bankruptcy trustee may examine all of your recent financial transactions. The trustee can void the payment as fraudulent and in bad faith because you knew you were never going to repay the new credit card debt. Trustees can claw back any payments greater than $600 to your creditors made in the 90 days before you file for bankruptcy. Moreover, the court may dismiss your case entirely if you’re found to have filed in bad faith, leaving you at the mercy of your creditors.
If you’re struggling to make ends meet, check out California’s public benefits. You may qualify for cash assistance or other help with your expenses. It’s a much safer way to get the money you need.
If you’re considering filing for bankruptcy in California, contact Borowitz & Clark today to meet with one of our experienced bankruptcy attorneys to discuss your circumstances and how best to meet your goals.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.