How Are Pawn Shop Loans Treated in Chapter 7 Bankruptcy?

A few days ago, I wrote a post entitled “How are Pawn Shop Loans Treated in Chapter 13 Bankruptcy?” Now, I want to speak about the treatment of pawn shop loans in Chapter 7 cases.

As was the case in my previous blog post, I can only write about Georgia law and the Chapter 7 treatment of pawn shop loans in Chapter 7 cases filed in the Northern District of Georgia. If you are filing your case in another jurisdiction or if you have recently moved to or from Georgia, you should consult a bankruptcy lawyer for legal advice specific to your situation.

Unlike Chapter 13, Chapter 7 bankruptcy is not a payment plan. It is designed to eliminate unsecured debt and if you can afford your secured debt, you have the option of reaffirming that debt, or walking away from your secured debt and giving up any secured collateral. Further, any real or personal property that is not covered by an exemption will be surrendered to the trustee for liquidation and payment to your bankruptcy estate.

Pawn shop debt and the associated collateral does not fit well into this framework. As far as your trustee and most bankruptcy judges are concerned, bankruptcy is about survival and financial essentials. Food, clothing, shelter - these are essentials. Heirloom jewelry is not an essential. By pawning these items, you are basically saying to the world that your pledged items are expendable.

From the pawn broker’s perspective, bankruptcy is not a good thing either. Georgia law provides that pawn contracts are to last 30 days. The last thing your pawn broker wants to deal with is a four to six month period where his cash is tied up and he can’t sell your pledged collateral.

As is the case with Chapter 13 and pawned collateral, you are better off filing your Chapter 7 before the pawn loan goes into default. Once the loan goes into default, title passes and you no longer own the property. (Note that Georgia law gives borrowers who have pledged a car title an additional 30 days to cure any default.) Your lawyer will need to get creative in making an argument to bring this property back into your bankruptcy estate.

Assuming you file your case before your pawn loan goes into default, you will have to make some decisions quickly. In Chapter 7, reaffirmation of a secured loan is voluntary on the part of the creditor and most pawn shop owners have no interest in reaffirming a loan once it goes into Chapter 7. Under the bankruptcy laws, inaction on the debtor’s part is equivalent to a surrender. Knowledgeable pawn shop owners - and more and more are becoming knowledgeable - will hire a lawyer and file a Motion for Relief from Stay and ask the judge to lift bankruptcy protection on the grounds that they do not want to reaffirm and you cannot provide them with any adequate protection. These motion have a high probability of success.

Perhaps the debtor’s best only real option is something called “redemption” in which the debtor comes up with a lump sum to buy the property. This can be difficult because most Chapter 7 debtors do not have ready access to cash. My colleague Michael Doan has written an informative blog post about redemption, which you can read by clicking on the link.  You can also read more about pawn shop loans and bankruptcy in the Northern District of Georgia by visiting my Atlanta bankruptcy web site.