How Pawn Shop Loans Are Treating in Chapter 13 Bankruptcy

The pawn business is booming. But pawn shops are not just doing 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, vehicle loans, school tuition and even essentials like food and clothing. Pawn industry trade magazines have taken notice of this trend and more and more pawn brokers are opening locations in high end shopping centers. Specialty pawn stores now look more like jewelry stores than merchandise filled pawn shops and they openly solicit wealthy customers. In Atlanta, there is a pawn store called “The Happy Hocker” that specializes in jewelry and watches advertises itself as the “pawn shop for the rich and famous.”

Bankruptcy lawyers are also seeing these well heeled borrowers. While the 2005 changes to the nation’s bankruptcy laws generally require wealthy debtors to file Chapter 13, there has been a steady upward climb in the number of bankruptcy filings by families who have household earnings of $100,000 or more. Not surprisingly, many of these high income bankruptcy filers have pledged into pawn collectibles, jewelry, electronics, watches and family heirlooms in an effort to raise cash. Scared, embarrassed and unsure about exactly how pawn stores work, these pawn borrowers unnecessarily risk their property if they are not alert to time deadlines and default provisions.

In most cases, the biggest risk to a pawn borrower arises from the default provisions of the pawn loan. Generally, upon default, title to the pawned collateral transfers to the pawn broker. Therefore, in general, if a borrower is thinking about filing for bankruptcy, he should file his case before the pawn loan goes into default and/or before title actually passes.

Although bankruptcy laws are federal laws and applicable in every state, pawn shop laws will 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 out the rules about what a borrower needs to do in order to keep his pawn loan out of default – usually this mean tendering an interest payment.

In most states, a Chapter 13 filing while the pawn transaction is still current will preserve the debtor’s ownership in the property. The automatic stay in bankruptcy will prevent the pawn broker from selling the property and the Chapter 13 plan will give the borrower an opportunity to pay back the pawn loan as a secured debt. The borrower may not get possession of his property right away, but at least he knows that the property is safe.

By contrast Chapter 13 may not be as much help after 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 that a clever lawyer may use to bring the pawned property back into 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 counsel prior to default to learn more about the applicable state law and the local bankruptcy procedures that deal with pawn loans.