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Friday, March 13, 2015

Pawn Loans in Bankruptcy

All debts must be disclosed and treated in a bankruptcy, including a loan with a pawnshop. It is somewhat unusual to see this type of debt in bankruptcy. I suspect that is because debtors don’t think of bringing it up to their attorney and most attorneys don’t think to ask if there are any pawn loans.

If you are filing Chapter 7, you may eliminate or "discharge" the debt owed to a pawnshop; however, if the debt is not satisfied you will lose the property used as collateral. If you are filing Chapter 13, it may be possible to treat the debt in a Chapter 13 plan and save the property used as collateral.

Property of the Estate

Under 11 USC 541(a)(1), any property in which a debtor has a legal or equitable interest becomes "property of the estate." As long as the contractual or statutory (state law) redemption period has not expired, the collateral used for a pawn loan and/or the right to redeem that collateral becomes part of the bankruptcy estate. Property of the estate is protected by the automatic stay provision of the Bankruptcy Code (see 11 USC 362).

If all applicable redemption periods have expired at the time a bankruptcy is filed, the collateral or a right to redeem the collateral is not property of the bankruptcy estate and the automatic stay does not apply. This is because once the right of redemption no longer exists, ownership of the collateral vests in the pawnshop. In other words, there is no legal or equitable interest to protect. 

Automatic Stay

If an applicable redemption period has not yet expired at the time of bankruptcy filing, the pawnshop cannot take the final action to gain ownership of the property because such action would be considered an action to enforce a lien, which would be a violation of the automatic stay.

The application of the automatic stay and its effect on redemption is not absolutely clear. However, the majority of courts have held that the automatic stay provision under §362 of the Bankruptcy Code does not toll the running of the redemption period. Assuming the majority position is correct, if the bankruptcy is filed before the expiration of the applicable contractual or state redemption period, §108(b) extends the redemption period for 60 days from the filing date of the bankruptcy. Anything beyond that 60-day extension would be an impermissible creation of a property right. Property rights are created and defined by state law. So, unless some federal interest demands a different result, the filing of a bankruptcy will have no impact.

The Bottom Line

The debt owed to a pawnshop can be discharged by filing bankruptcy, but discharging the debt does not allow a debtor to save the property used as collateral. Chapter 13 may offer some limited relief, but timing is crucial. If the applicable redemption periods for the collateral have expired, a debtor’s ability to treat the pawn loan in a Chapter 13 is most likely nonexistent. If an applicable redemption period has not expired, a debtor may treat the pawn loan over the course of the later of the end date under the applicable contract, the redemption period provided by state law, or within the 60 days following the filing of the bankruptcy. The available time to treat a pawn loan is extremely short. Being aware of the limited time to treat a pawn loan will help in coming up with a successful plan to save the property.  

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