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Can I Bankrupt Car Title Loans?

All loans come with risks if they’re not repaid on time. However, a car title loan carries an especially troubling consequence if you fail to meet your payment obligations: The lender can take your vehicle. Before you consider getting a title loan, consider the potential potholes you’ll hit if you use your vehicle as collateral to borrow money.

A car title loan is a short-term loan that lets you secure a small amount of money in exchange for giving the lender the title to your vehicle.

You’ll also pay a sizable fee to borrow the money. A car title loan is a short-term loan secured by your car. You can typically only get a title loan if you own the car free and clear. You’ll have to take in your title and a copy of your key and leave it as security. You’ll also have to pay certain fees. Then the lender will give you cash and you’ll have a set period of time, usually 30 days, to repay it. If you can’t pay after 30 days, your lender will give you the option of rolling over your loan for a fee so that you have another 30 days to pay. If you default on the loan, and the lender has correctly perfected their security interest, the title lender can repossess your vehicle. You’ll be liable for the repossession fees, too.

Let’s say you own a car worth $10,000, and you find yourself in an emergency situation that requires $5,000. A title loan lets you borrow against your vehicle, so you can get that $5,000 quickly. Just as a mortgage is backed by your home, a title loan uses your vehicle as collateral.

One of the main pieces of information that people need to understand about a title loan is that it uses the equity in your vehicle for collateralizing the money you will borrow. In most cases, you need to own your vehicle outright to qualify for a car title loan. The term car may be in the product name, but these loans also can be available for motorcycles, boats and recreational vehicles. While some lenders will offer loans if a car is still being paid off, most require the owner to hold the title with no debts attached to the vehicle. Consumers typically can borrow between 25 and 50 percent of the car’s value.

How Do Title Loans Work?

Car title loans come in a couple different varieties. Some are single-payment loans, meaning the borrower have to pay the full amount of the loan plus the interest rate fee within a month or so. Installment loans, with similarly high APRs, can be paid back over three or six months, depending on the lender. When applying for a car title loan, prepare to show the lender a clear title, proof of insurance and a photo ID. Some lenders ask for a second set of keys. While getting a title loan may be easy, the convenience comes with serious costs and risks. Some car title lenders install a GPS device that can prevent the borrower’s car from starting, using this practice as a means of collecting a debt or making it easier to seize the car. In addition to being (the) primary means of transportation to work, the doctor and elsewhere, a car is often the largest financial asset that a person has. The looming threat of losing your car is anxiety-inducing to put it mildly.

Downsides to Title Loans

The biggest downsides to title loans are a short repayment period, sky-high interest rates and the potential loss of your car if you default. These are usually short-term loans with very tight repayment cycles. If you can’t pay back the loan when it’s due, it’s rolled over into another cycle with more fees. It creates a very difficult situation for people who are already struggling to repay. It is the exact definition of the cycle of debt.

In addition to tight repayment deadlines, car title loans have overwhelmingly high interest rates. Lenders often charge 25 percent each month in financing charges. On a $2,000 loan, you’ll pay an additional $500 in interest if the loan is repaid in 30 days. If you’re late with your payment and those interest charges pile up, the loan can wind up costing a lot more than the initial sticker price. The biggest downside, though, is possibly losing your car. If you can’t pay it back, the lender can take your vehicle.

Alternatives To Title Loans

With such serious downsides, reaching out to traditional banks and credit unions to explore other, less costly lending options. A lot of people might avoid traditional lenders because of assumptions about their credit and that’s the most dangerous thing you can do. You’re cheating yourself out of money you could potentially save. Even if you don’t have a bank account, have a lower credit score or have struggled with poor financial decisions in the past, it’s worth investigating all your loan alternatives. It’s interesting how flexible these traditional lenders can be. There are a lot of credit unions that are willing to work with unbanked customers. If you have unused credit on a credit card, you could rely on it to help cover your cost. In most cases, the interest rate on your credit card is going to be much less than what you end up with on a car title loan. And that route prevents you from potentially losing your vehicle.

To get a car title loan, you need to own your car or have equity in it.

A car title loan is a small secured loan that uses your car as collateral. Car title loans tend to range from $100 to $5,500 an amount typically equal to 25% to 50% of the car’s value. The loan term is short usually just 15 or 30 days. And although it’s called a “car” title loan, this type of loan also applies to other vehicles, including trucks and motorcycles. To get a car title loan, you’ll need clear title 100% ownership of the car, without any liens or at least some equity in your vehicle. Car title loans are also called pink-slip loans, title pledges or title pawns. In addition to your car title, the lender will typically want to see your car, a photo ID and proof of insurance. If you get approved for a car title loan, you give your car title to the lender in exchange for the loan. You get your title back once you pay off the loan.

Car title loans have high fees and interest rates

With a car title loan, it’s not uncommon for lenders to charge around 25% of the loan amount per month to finance the loan. For example, if you get a 30-day car title loan for $5,000 and the fee is 25% ($1250), you’d have to pay $6,250, plus any additional fees, to pay off your loan at the end of the month. This translates into an annual percentage rate, or APR, of more than 300%. That’s much higher than many other forms of credit, including credit cards. When you get a car title loan, the lender must tell you the APR and total cost of the loan. You can compare this information across other lenders to help find the best offer possible for you.

If you can’t repay a car title loan, you could lose your car

If you get a car title loan and you can’t repay the amount you borrowed, along with all of the fees, the lender might let you roll over the loan into a new one. When you do this, you add even more fees and interest onto the amount you’re rolling over.

Let’s say you have a $500 loan with a $125 fee. At the end of the 30-day term, you are unable to pay it all back. You pay the $125 fee and roll over the $500 balance into a new loan with a 25% fee. If you pay your new loan off, you’ll have paid a total of $250 in fees on the $500 you borrowed. If you continue to roll over your loan, you could end up in a cycle of additional fees that make it impossible to repay the lender. If you find yourself in a situation where you can’t pay off the debt, the lender could repossess your car. And you could end up paying even more in fees to get the vehicle back, along with the past-due amount. Assuming you can’t pull that together, you’ll be left scrambling to find (and pay for) new means of transportation.

Chapter 7 Bankruptcy and Car Title Loans

In Chapter 7 bankruptcy, you’ll surrender your non-exempt assets to the bankruptcy trustee. In California, you can choose between two different sets of exemptions. Remember that exemptions only apply to the equity you hold in an asset and are used to determine whether or not the trustee can sell the asset. They do not affect secured debts. The trustee will sell your nonexempt assets and pay the proceeds to your unsecured creditors. At the end of the process, your remaining unsecured debt will be discharged. However, a title loan is a secured debt.

Under Chapter 7, you have the option to redeem a secured debt. That’s the only way to keep your car through the bankruptcy. To redeem title loan debt, you’ll have to pay the market value of the car in one lump sum. For example, say your car is worth $10,000 but you owe $15,000 to the title lending company. You can pay $10,000 in bankruptcy and the rest of the debt will be discharged. However, it’s difficult for most debtors to put together enough cash to redeem the debt. There are, however, companies that specialize in funding redemptions, and your attorney can discuss these with you. You may instead choose to reaffirm your debt. When you reaffirm a debt, you agree to continue to be bound by that debt throughout and after your bankruptcy. You’ll continue to make your regular monthly payments on that debt until you’ve paid it off. However, a reaffirmed debt cannot be discharged in a future bankruptcy. If you reaffirm, you’re stuck with that debt until you pay it. If you can’t redeem the debt, consider selling the car before you file for bankruptcy and using the proceeds to repay the title loan debt. If your car isn’t worth enough to sell, you can surrender it to the title loan company. Either way, you’ll lose your car. Without bankruptcy, the title lending company would be able to sue you for the deficiency between what you owed and what they got for the car at auction. After your bankruptcy discharge, you won’t be liable for any deficiency. If you receive your bankruptcy discharge without addressing your title loan debt, the lender will repossess your car as soon as your bankruptcy ends. If they sell it and the proceeds are less than your debt, you’ll be liable for the deficiency.

Chapter 13 Bankruptcy and Car Title Loans

Under Chapter 13, you have more flexibility to deal with a car title loan. When you file for Chapter 13 bankruptcy, you work with the bankruptcy trustee and the court to come up with a payment plan that lasts for three to five years. You can deal with the title loan through your payment plan. As under Chapter 7, you can keep your car if you pay its market value. Chapter 13 allows you to spread that payment out over the life of your plan rather than paying it all at once. You’re much more likely to be able to keep your car under Chapter 13 than Chapter 7.

How can I keep my car without filing bankruptcy?

The best way to make sure you keep your car is to avoid car title lending. You need your car to get to work, take your kids to the doctor, and pick up groceries. Title lending is intended to trap you and force you deeper and deeper into debt. It’s just like payday lending, but much less carefully regulated by law. Because title loans are secured loans, they are not discharged in bankruptcy. Don’t use a credit card or other form of unsecured debt to pay off your title loan in an attempt to convert your secured debt to unsecured debt. The bankruptcy trustee may examine all of your recent financial transactions. The trustee can void the payment as fraudulent and in bad faith because you knew you were never going to repay the new credit card debt. Trustees can claw back any payments greater than $600 to your creditors made in the 90 days before you file for bankruptcy. Moreover, the court may dismiss your case entirely if you’re found to have filed in bad faith, leaving you at the mercy of your creditors.

Bankruptcy Exemptions

The bankruptcy court allows those filing Chapter 7 bankruptcy a certain amount of money, called an exemption, for a car (as well as a house and other belongings). The federal exemption is $4,000 and it’s updated every three years. But 31 states have their own exemptions that those filing bankruptcy have to go by. Some are lower than the federal exemption and some are higher. If a car’s value is less than the exemption, you can keep it under Chapter 7 bankruptcy. If it is higher, the bankruptcy trustee may decide to sell the car to help pay your unsecured debt. You would keep the amount of the exemption, with the rest going towards debt.

As an example, let’s say your state exemption is $10,000, and your car is worth $9,000. You can keep your car, because the exemption is higher.
But, if your car is worth $15,000, the bankruptcy trustee might sell it and you get $10,000 for another car, and what was left of the $5,000 balance, after fees, would go toward unsecured debt. To boost the exemption amount, you can also use the wildcard exemption, an extra exemption that those filing bankruptcy can use for things not covered by specific exemptions. The federal wildcard exemption is $12,575. Often the wildcard is enough that when it’s added to the car exemption, it can cover the value of a car that wouldn’t otherwise be exempt. When filing for bankruptcy, you list property that is legally exempt on Schedule C. Schedule C is the list of legally exempt property that you can keep under Chapter 7 bankruptcy. The property may also be listed in A/B, under assets. Be sure it’s described the same way and it’s clear it’s the same property If this process sounds complicated, it’s because it is. You may want to consult a bankruptcy attorney to help you sort out the ins and outs of exemptions and keeping your car, as well as dealing with the rest of the bankruptcy filing.

Filing Bankruptcy When You Don’t Own the Car

If you are still making payments on your car loan when you file for bankruptcy, then the equity you have in the car becomes important. Equity is what you still owe on the car subtracted from its current value. For instance, say your car’s value is $9,000 and you still owe $4,000 that means you have $5,000 equity if you sold the car, you’d make $5,000. The exemption in your state is $6,000. Since your equity is less than the state’s exemption, you keep the car. If it’s more, the bankruptcy trustee can sell it, putting the equity toward your unsecured debt and allowing you to buy a $6,000 car. The longer you’ve owned the car and the more you’ve paid, the more likely it will be over the exemption limit. On the other hand, cars are not like fine wine they lose their value fast. The longer you’ve had it, the less its worth.