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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