Last updated Aug. 6, 2024 by Charles Zemub
Are Car Title Loans Included In Bankruptcy?
Car title loans, a type of secured loan where your vehicle’s title is used as collateral, can offer a lifeline during financial crises. However, they often come with high-interest rates and can lead to deeper financial issues. This brings up the question: Are car title loans included in bankruptcy? The answer is both complex and conditional, varying based on the type of bankruptcy you file.
Understanding Car Title Loans
To comprehend whether car title loans are included in bankruptcy, it’s crucial first to understand what these loans entail. Car title loans are usually short-term loans that require the borrower to hand over the title of their vehicle as collateral. While they can provide quick cash, they often come with exorbitant interest rates that can exceed 300% APR. Should the borrower fail to repay the loan, the lender has the right to repossess the vehicle.
What Is Bankruptcy?
Bankruptcy is a legal process involving a person or business that is unable to repay their outstanding debts. The process is initiated by the debtor and is imposed by a court order, commonly initiated by the debtor. Bankruptcy provides an opportunity for debt relief, but it comes in various forms, known as Chapters, with the most common being Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," involves the sale of the debtor’s non-exempt assets by a trustee. The proceeds are then used to pay creditors. One might wonder if car title loans are included in Chapter 7 bankruptcy. The answer is that it depends on several factors:
- Vehicle Status: Generally, if your car is considered an essential asset, such as being necessary for commuting to work, you might be able to keep it. Nonetheless, you’ll have to keep making payments to retain ownership.
- Loan Status: If you’re current on your car title loan payments, you might be allowed to continue making payments and keep your car. However, if you’re delinquent, the lender can still repossess the vehicle, despite the bankruptcy filing.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, known as "wage earner’s plan," allows individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, you’ll be given a three to five-year period to repay your debts, including any overdue car title loan payments.
- Repayment Plan: You can incorporate your car title loan into your repayment plan. This allows you to stretch out the payments over the span of your Chapter 13 plan, potentially lowering your monthly payments.
- Cramdown Provision: Chapter 13 includes a "cramdown" provision, which may allow you to reduce the loan balance to the market value of the vehicle. This is possible if the loan was incurred more than 910 days prior to the bankruptcy filing.
Potential Outcomes
When filing for bankruptcy, the inclusion and treatment of your car title loan can have several outcomes:
- Repossession: If you’re behind on payments and cannot formulate a feasible repayment plan, the lender may repossess the vehicle.
- Retention: By staying current on your payments and including the loan in your bankruptcy plan, you may be able to keep your vehicle.
- Loan Modification: Especially under Chapter 13, you might negotiate better loan terms to make the repayment more manageable.
The Automatic Stay
One of the immediate benefits of filing for bankruptcy is the automatic stay, which prevents creditors from pursuing any collection activities, including repossessing your car. While this gives you breathing room, it’s a temporary measure, and you’ll need to sort out the car title loan within the terms of the bankruptcy.
Meeting Bankruptcy Requirements
Not everyone qualifies for bankruptcy, and specific criteria must be met. Under Chapter 7, you must pass the "means test," which evaluates your financial status. For Chapter 13, you need a regular income to follow through with the repayment plan.
Credit Counseling
Before filing for either Chapter 7 or Chapter 13 bankruptcy, you’re required to undergo credit counseling from an approved agency. This step is necessary to evaluate if bankruptcy is the appropriate route or if there are alternative solutions.
✓ Short Answer
Car title loans can be included in bankruptcy, but the specifics depend on whether you file under Chapter 7 or Chapter 13. In Chapter 7, you may be able to keep your car if it’s essential and you’re current on payments. In Chapter 13, you can incorporate the loan into a repayment plan and potentially reduce the balance to the vehicle’s market value.
Legal Assistance
Given the complexities involved, consulting with a bankruptcy attorney is highly recommended. An attorney can help you navigate the process, ensure you meet all requirements, and help you understand the implications for your car title loan.
Preparing for the Future
After filing for bankruptcy, it’s essential to build a more secure financial future:
- Budgeting: Create a budget to manage your expenses and avoid future high-interest loans.
- Rebuilding Credit: Focus on rebuilding your credit by paying bills on time, possibly securing a secured credit card, and monitoring your credit report.
- Emergency Fund: Establish an emergency fund to cover unexpected expenses and reduce the need for high-interest loans.
FAQs
Q: Are car title loans dischargeable in bankruptcy?
A: Car title loans, being secured loans, are not typically dischargeable in Chapter 7 bankruptcy. However, they can be included in the repayment plan in Chapter 13 bankruptcy.
Q: What happens to my car if I file for Chapter 7 bankruptcy?
A: If you are current on your payments and the car is deemed essential, you might be able to keep it. If you’re behind on payments, the lender may repossess the vehicle.
Q: Can I reduce the amount I owe on a car title loan in bankruptcy?
A: Under Chapter 13, you might be able to use the cramdown provision to reduce the loan balance to the market value of the car, provided certain conditions are met.
Q: What is the automatic stay, and how does it affect my car title loan?
A: The automatic stay is a court order that halts all collection activities. This can temporarily prevent repossession of your vehicle until the bankruptcy terms are sorted out.
Q: Is legal assistance necessary for including a car title loan in bankruptcy?
A: Given the complexities, seeking legal assistance from a bankruptcy attorney is highly advisable to navigate the process effectively and understand the ramifications for your car title loan.
Conclusion
Car title loans can be a significant source of financial strain, and including them in bankruptcy can provide some relief. However, the specific treatment of these loans depends on the type of bankruptcy filed. Understanding your options and seeking legal counsel will aid in making informed decisions, helping you achieve financial stability.
