What happens to car title loans in bankruptcy?
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UPDATED: Feb 8, 2021
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Unfortunately for borrowers undergoing bankruptcy, car title loans are not permitted to be discharged through bankruptcy proceedings.
Car title loans are secured loans. A secured loan is one in which a valuable asset, in this case a car, is offered as security to obtain financing. By securing a loan with an asset of a value, a borrower shows a lender that there is less risk for the lender to offer money to the borrower. If a lender approves of offered collateral and gives a loan to a borrower, the borrower must remember that if he or she doesn’t make timely payments on the loan and defaults, then the lender can seize the collateral to make up for the lost money the lender loaned out.
In effect, when securing a loan with collateral, a borrower “prepays” for their loan. In the event they cannot repay their debt, a lender takes the collateral as payment.
Therein lays the reason why auto title loans cannot be discharged through bankruptcy: a borrower who runs into debt problems can still pay for their title loan since they still have their collateral, and thus they are forced to relinquish their vehicle.
Current bankruptcy practices seem to agree with this principle.
As far as car title loan companies and our legal system are concerned, in bankruptcy proceedings a car used as collateral is to be repossessed. It was agreed by both the car title lender and the borrower that the car was to be collateral in the agreement. Since by declaring bankruptcy a borrower is stating their inability to repay the loan, the car title lender has little choice but to repossess the car to make up for the profit loss on the loan the car title lender gave out.
But even in bankruptcy, borrowers still have a chance to retain possession of their car. However, it’s a very small and improbable chance.
The only option a borrower would have in preventing their car from being repossessed would be to find enough money to reaffirm or pay off the remainder of their car title loan. A borrower could also try to avoid bankruptcy by selling items and assets of value or by turning to family and friends for help in a time of need. Prospective borrowers may be able to foresee payment complications prior to borrowing by finding quotes online and educating themselves about car title lending and bankruptcy proceedings.