What Happens to Pawn Loans in Bankruptcy?

All debts must be disclosed and treated in a bankruptcy, including a loan with a pawnshop. The terms of the pawn loan, the type of bankruptcy filed, and the timing of a bankruptcy filing will determine what type of relief is possible.

The Bankruptcy Code makes any property in which a debtor has a legal or equitable interest "property of the estate" (see 11 USC 541(a)(1)). If the contractual or statutory redemption period has not expired, the property used for a pawn loan and/or the right to redeem that property 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). In other words, the pawnshop would not be able to 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 time limits is not absolutely clear. However, the majority of courts have held that the automatic stay provision 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) of the Bankruptcy Code 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.

If all applicable redemption periods have expired at the time a bankruptcy is filed, the property or a right to redeem the property is not part 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 property vests in the pawnshop. In other words, there is no legal or equitable interest to protect and Chapter 13 would not allow you to save the property.

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. The available time to treat a pawn loan is extremely short, so make sure to take action as soon as possible. Consulting with an experienced bankruptcy is crucial for determining your options. Most bankruptcy attorneys offer free consultations, so take advantage of it!

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