Falling on financially hard times can leave you considering any and all loan options out there. As a last resort, some are forced to turn to something called a Title Loan. These loans come with enormous interest rates and put the ownership of your vehicle in jeopardy.
This loan made in desperation can end up putting you in a deeper hole and convince you that bankruptcy is the only way out. But does bankruptcy help you escape your title loan?
Can You File Bankruptcy on a Title Loan?
A title loan is a small, short-term loan secured with a vehicle used as collateral. Title loan companies often don’t do background checks or credit checks on you, but those relaxed standards come at a price. These loans carry a high-interest rate and may also include a borrowing fee for the lender on top of that.
Would You Benefit From Bankruptcy?
Schedule a completely free, no obligation consultation with our team
The loan must usually be repaid in 30 days. If you don’t pay off your loan in the agreed-upon time, your car, SUV, truck, or motorcycle may be repossessed.
Title Loan lenders often try to avoid this outcome. They often try to work out a new agreement for paying off the loan, but this concession can add more fees and higher interest rates to already punishing loan terms.
There are a few other restrictions for securing a title loan:
- You must own the vehicle you offer as collateral.
- The vehicle must have a clean title. No one else can dispute your ownership of the vehicle.
- The amount of the loan must not be for more than the value of the car.
California Title Loan Laws
After changes in title loan laws took effect in 2020, California has restricted unfair interest rates charged by title loan companies. Interest rates on consumer installment loans from $2,500 to $9,999 are now capped at 36% plus Federal Fund Rates.
Title loan companies must inform you of any administrative or processing fees and of the interest they charge. California requires title loan companies to evaluate if the borrower can pay back their debt and avoid lending to people who likely won’t be able to make their payments.
However, some lenders advertise that they don’t check credit histories in order to attract customers. A credit check would be one to evaluate the borrower’s financial stability. This promise of no credit history inquires violates California’s statutes.
Bankruptcy and Car Title Loans
Bankruptcy is a financial option for those under a cloud of inescapable debt. Filers hope to either have their debt wiped clean in a discharge or negotiate to pay back only a portion of their outstanding loans. The discharge of debt is only for certain kinds of debt. Unsecured debt, like credit card balances, medical charges, and some loans may get wiped away upon completion of the bankruptcy process.
Request Your Free Consultation
"*" indicates required fields
A discharge doesn’t offer a lifeline when it comes to secured debts. These are debts secured by property such as a home loan, secured by the house. Unfortunately, this also applies to title loan debt since it’s secured by the vehicle.
Car Title Loans and Chapter 7 Bankruptcy
A Chapter 7 Bankruptcy is used to earn a discharge from qualifying debt. It’s a four to six-month process, but unfortunately, your filing likely won’t provide much relief from your title loan obligations.
In plain terms, you must keep paying towards your car title loan throughout the process or you will most likely lose the vehicle. For starters, your bankruptcy trustee may sell the vehicle to compensate the loan company unless you use a bankruptcy exemption to keep it during the filing.
Since a car title loan is a secured debt, if you don’t do anything about it during the process, the debt will likely survive a Chapter 7 Bankruptcy. At that point, you’ll need to either start making payments again or the title loan company may choose to repossess the vehicle.
There are two other options borrowers can try through Chapter 7 bankruptcy:
- Redeem the Debt: Chapter 7 gives you the option of making a one-time payment equaling the current value of the vehicle. This would let you take back ownership. The money you owe on the title loan may now add up to more than what the vehicle is worth, but the difference would be discharged at the end of your bankruptcy.
- Reaffirming the Debt: You can reaffirm the debt and keep paying towards the balance throughout the bankruptcy process and after it is complete. It’s important to note that by reaffirming the debt you can’t have it wiped clean in a future bankruptcy. You are stuck with the loan until it’s been paid in full.
Filers can also sell the car to pay the balance off or surrender the vehicle to the title loan company. The company would liquidate the vehicle and if the selling price didn’t cover the loan amount, you might still be on the hook for the difference.
Car Title Loans and Chapter 13 Bankruptcy
Chapter 13 Bankruptcy takes a longer-term approach to your debt. You’ll present a plan to pay back a portion of your debt over a three to five-year period.
Your title loan debt could get included in this plan and you may be able to negotiate to only have to pay a portion of your balance. A Chapter 13 Bankruptcy offers more flexibility to delay the repossession of your vehicle and work out a new payment plan that’s more manageable.
Chapter 13 often leaves the filer making smaller payments over a longer period with less interest. Bankruptcy trustees often apply a statutory interest rate to many of your loans and this is a much lower rate than the title loan contract stipulated.
You are also usually only required to pay towards the true value of your car. If your loan is more than the value, the difference can be erased in a Chapter 13 discharge.
Your bankruptcy trustee may also force the title loan company to return a recently repossessed vehicle. You’d resume possession and use of the car and be able to pay towards owning it again.
There are fewer ways your vehicle may be taken from you as well, but you’ll have to commit to that three to five-year payment plan and meet each due date to enjoy the full benefits of a Chapter 13 bankruptcy.
How Can I Keep My Car Without Filing For Bankruptcy?
Keeping your vehicle is often necessary to keeping your family life stable and retaining your employment. It’s often impossible to keep up with the basic requirements of life without transportation. Before turning to bankruptcy to save your vehicle, you can try a few strategies that could delay your need to file.
One way to delay the need for bankruptcy is to approach the lender and explain your situation. Title loan lenders see many of their debtors default on loans and they are used to having to work with customers to reach a positive outcome.
These companies don’t like to repossess vehicles because it can turn into a legal mess and draw attention to their less than fair tactics. And quite frankly, they would rather you kept paying your high-interest payments, even at a lower rate. You can talk to them about an adjustment in terms and see if they are willing to give you a break.
You can try to consolidate your debt into a bigger loan with a lower interest rate if possible. You could pay off your title loan this way and rid yourself of accumulating debt and fees, but you have to be careful.
It’s important to not take desperate measures when under a title loan that could hurt your chances of completing a bankruptcy down the road. If you obtain another loan to pay off a title loan with no means to pay back the lender, it could leave you back in debt down the road. A bankruptcy trustee might spot the transfer of debt and negate the payment, leaving you back in arrears with the title loan lender. This reckless behavior could also encourage a judge to throw out your bankruptcy bid.
You may also choose to sell your vehicle and opt for a less expensive car. This would hopefully leave you with money to pay off your debt, or at least make a few more payments on time until your situation improves.
Contact A Los Angeles Bankruptcy Lawyer Serving Southern California
People under difficult financial circumstances can turn to title loan lenders to get some quick cash. This move often only delays a complete financial collapse by a month or two. That’s why it’s important to get an expert’s help with determining what your best option will be.
So, is filing for bankruptcy a good move for you? It’s wise to discuss your unique situation with a local bankruptcy attorney who can help you decide whether bankruptcy is the best decision for your financial situation. You can reach out to the Law Offices of Steers & Associates and ask any questions about bankruptcy.
We can help you evaluate your situation with a free and confidential bankruptcy consultation. Contact us today to schedule your free consult.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.