Holding All the Cards and Coming for Your Car: Georgia Title Pawns

A Chapter 13 Debtor has many options available when dealing with “short-term” debt (a debt that matures before the last date of the bankruptcy plan payment).  The bankruptcy plan can often reduce the value and interest and pay the remaining amount over as long as five years. 

Under Georgia law car owners can pawn motor vehicle titles for cash.  The…let’s call it a “loan” for the moment…carries a hefty finance charge and a staggering interest rate that can easily exceed 150% per year!  The usual pawn agreement requires the loan to be repaid, with interest, in a very short amount of time – usually 30 days – but the law allows a “grace period” of 30 more days, for a total of just 60 days to repay the loan, called the “redemption period.”  On its face, this is exactly the type of short-term debt that can be addressed in a Chapter 13 plan: Take up to five years to repay the loan and reduce the crushing interest.  For many years that’s exactly how title pawns were treated. 

That changed in December 2017 when the Eleventh Circuit Court of Appeals issued its decision in Max v. Northington (In re Northington), 876 F.3d 1302, 1315 (11th Cir. 2017).  Georgia’s pawn statute does not describe a lending or debtor-creditor situation.  The original vehicle owner is not called a borrower, but a “pledgor.”  In Northington, the Debtor filed his case with three days remaining in the grace period.  He proposed to repay the title pawn in his Chapter 13 case, but the plan was not confirmed until several months later. 

Even though the confirmed Chapter 13 plan proposed treatment of the title pawn “debt,” the Eleventh Circuit said this was irrelevant:

[T]he applicable state law is crystal clear: Under Georgia’s pawn statute, “[p]ledged goods not redeemed within the grace period shall be automatically forfeited to the pawnbroker . . . and any ownership interest of the pledgor or seller shall automatically be extinguished as regards the pledged item.” Ga. Code Ann. § 44-14-403(b)(3) (emphasis added). All agree that under Section 44-14-403(b)(3)’s plain terms, the expiration of the redemption period is conclusive—the debtor loses title to his pawned property, which vests immediately and by operation of law in the pawnbroker.

Even though the Debtor in Northington still had an interest in the vehicle at the time the bankruptcy case was filed, the automatic stay did not prevent the vehicle from “drop[ping] out of the estate.”  In other words, the Eleventh Circuit held that a Debtor’s property rights are not frozen in time when a bankruptcy case is filed, and a creditor’s state-law rights can affect property in a bankruptcy estate.

The outcome in Northington is a major setback to debtors’ attorneys and their potential clients.  The decision leaves few options in a situation where the redemption period is about to expire, and the Debtor can’t pay the full amount due.  A recent case from the Southern District of Georgia confirmed that if the redemption period has already expired before the bankruptcy filing, the title pawn company owns the vehicle and was not required to take any action in the bankruptcy case. In re Thorpe, No. 18-20082 (Bankr. S.D. Ga. Mar. 29, 2019). 

If the redemption period has not expired, Section 108(b) of the Bankruptcy Code provides limited help by extending the redemption period for 60 more days.  But what can you do in just 60 days?!  First, the Chapter 13 plan allows a certain amount of creativity when dealing with creditors.  In certain circumstances it may be possible to focus every effort into repaying the title pawn in the first 60 days.  While this may temporarily delay payments to other creditors, it might just work if hanging onto the car is essential to completing the plan.  Second, depending on the timing, it may be possible to use a work bonus or tax refund to pay the debt off, or to secure traditional financing from another lender that would pay off the title pawn.

Even after the redemption period has passed, the title pawn companies will sometimes accept payments, but those arrangements would not renew or extend the redemption period.  In those situations, the company might prefer to continue to receive periodic payments instead of getting possession of the vehicle.  This might be an acceptable short-term solution for a Chapter 13 debtor, provided that the Trustee does not object to the direct payment of “short term debt” (which would not be a very accurate description of the arrangement).     

If all else fails, the vehicle can be surrendered.  The title pawn is not a “recourse loan,” so the Debtor will not be faced with the need to pay a deficiency claim (the balance owed on the vehicle after it is sold) if the vehicle is turned in. 

The very best advice is to avoid any type of transaction that might put your ride to work at risk! 

The7thirteen is a blog presented by Narmore Law Office LLC, focusing on consumer bankruptcy issues.  Visit the website at narmorelawoffice.com.