There are situations where people will take out a short term loan against their car or some other vehicle. Typically, these loans have high rates of interest, and are marketed to people who are unable to secure credit in more traditional ways. Their treatment in bankruptcy can come as a great relief to debtors who find themselves paying and paying, yet never making any headway in paying off the loan.
By any reasonable standard, these loans are predatory. How predatory? You decide. In early 2014, the Center for Responsible Lending and the Consumer Federation of America issued a report on car title loans and their impact on consumers. Among the report’s findings were:
- About 1.7 million car title loans are made every year across the US.
- The average car title debtor pays $2,142 in interest on a $951 loan and renews the loan eight times. It resembles a revolving door that is difficult to get out of.
- About 7,730 car title lenders operate in 21 states, charging borrowers $3.6 billion in interest on $1.6 billion in loans each year.
- A typical borrower receives cash equal to 26 percent of a car’s value and pays an annual percentage rate of approximately 300 percent.
As a loan against secured property, a title loan will normally be annotated on the back of the car title. This is done to “perfect” the creditor’s lien on the property. Like any properly perfected secured loan, if the loan is not paid off, the creditor has the right to repossess the collateral. This is true, of course, with any secured debt on any collateral. The advantage of a bankruptcy filing can be that a debtor can use a Chapter 13 (or even a Chapter 11) plan to modify the outrageously high interest rate on the loan. In a Chapter 13 plan, the title loan can be paid at the Chapter 13 Trustee’s discount rate of interest, rather than the title loan company’s unreasonably high contract rate of interest. Spread out over the life of the loan, this fact can save a debtor thousands of dollars. It is another little-known but very powerful provision of bankruptcy reorganizations. Once the plan is filed, it is the plan–not the original loan contract–that becomes the contractual relationship between the parties.
So, although title loans are basically just a type of secured loan, the Chapter 13 plan can be used strategically to force the loan into a low interest, reasonable form. And if the title loan was entered into more than 910 days (about two and a half years) before the bankruptcy filing, the debtor can “cramdown” the loan to the value of the collateral, rather than paying back the full loan balance. So, the overall advantages of treating a title loan in a Chapter 13 bankruptcy can be significant. In fact, we have seen some people file a Chapter 13 case mostly for this reason. This is important to appreciate. Some people incorrectly believe that they are stuck with a title loan’s onerous contract terms forever. And fortunately, this is not correct.
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