Cartersville Bankruptcy Lawyer: Modification of Title Pawn Loans in Chapter 13 Bankruptcy: Traps for the Unwary

Chapter 13 plans routinely modify obligations secured by the Debtor’s automobile.

Our stagnant economy and high rate of unemployment has caused an alarming increase in the number of “title pawn” lenders in the State of Georgia.  These loans appeal to desperate borrowers; sort of a “quick fix,” especially since there’s no credit check.  However, beneath the surface, title pawn loans are so unfair and one-sided, that they’re only legal in 2 states – Georgia and Alabama.  The typical annual percentage rate of interest on a title pawn transaction is THREE HUNDRED PERCENT (300%).

The nature of the transaction is disturbing.  The desperate consumer (“DC”) actually “sells” her vehicle to the title pawn lender (“TPL”).  In exchange for the car, the TPL gives the DC a fraction of her car’s value, and a “right to redeem” the vehicle by paying a certain amount within a certain period of time.  If DC doesn’t pay within her redemption period, she loses the car (and all of its equity) – permanently.  An article written by the Atlanta Journal-Constitution features a DC named Scott Oden, who lost his $13,000 Ford Expedition over a $2,000 title pawn transaction.

Chapter 13 bankruptcy attorneys need to carefully evaluate the constellation of legal issues involved with title pawn transactions.  For starters, the attorney must determine:

– Whether the pawned vehicle is still property of the estate (i.e., has the Debtor lost her right of redemption?).   In the case of a pawned motor vehicle, bankruptcy courts in Georgia have determined that property of the estate does not include a pawned vehicle if the grace period for redemption has expired and the pawnbroker has repossessed the vehicle at the time of the bankruptcy filing, or if the pawnbroker has taken possession of the vehicle even if the grace period for redemption has not expired.  See, Barnette v. Bankers Financial 11 Services (In re Barnette), 2008 WL 7842071 (Bankr. N.D. Ga. 2008); In re Bell, 279 B.R. 890 (Bankr. N.D. Ga. 2002); and Oglesby v. Title Max (In re Oglesby), 2001 WL 34047880 (Bankr. S.D. Ga. 2001).

– If the right of redemption has expired, the Debtor’s attorney should ascertain whether the vehicle is still property of the estate by virtue of 11 U.S.C. § 548(a)(1)(B) because the transaction is voidable as a fraudulent transfer.  To recover a pawned vehicle under § 548(a)(1)(B), the Debtor must establish that (1) she made a transfer of her property to Pawnbroker (2) within one year before the filing of her bankruptcy petition (3) for less than a reasonably equivalent value in exchange for the transfer and (4) at the time of the transfer she was insolvent or the transfer rendered her insolvent.

–   After expiration of the grace period, the Debtor may have state-law defenses to save the vehicle.  Traditional doctrines of waiver, estoppel, novation, accord and the like might be invoked to demonstrate that the parties by their conduct have necessarily changed the rules that govern their transaction.  For example, in In re Jones, 206 B.R. 569 (Bankr. M.D. Ala. 1997), the court found that a creditor’s agreement to forbear with regard to enforcement of a motor vehicle pawn resulted in a secured transaction subject to Alabama’s Uniform Commercial Code rather than a pledge under the Alabama Pawnshop Act.   These defenses can be raied in opposition to the pawn-broker’s Motion to Lift Stay, or in support of the Debtor’s Complaint for Turnover under 11 U.S.C. § 542.  For a discussion of these issues, see In re Bell, 279 B.R. 890 (Bankr. N.D. Ga. 2002).

–  Assuming the Debtor’s vehicle is still property of the estate, her chapter 13 bankruptcy attorney needs to make sure that appropriate “affirmative steps” are taken to redeem the vehicle through the chapter 13 plan.  According to the Eleventh Circuit Court of Appeals in Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), under applicable Alabama law, the pre-petition repossession of the debtor’s motor vehicle in which the creditor had a security interest left the debtor only with a right to redeem it by paying the debt in full.  The court ruled that property of the estate included the debtor’s right to redeem, but that such right did not render the vehicle itself property of the estate, at least for purposes of requiring the creditor to turn it over to the debtor under 11 U.S.C. § 542(a).

With regard to the debtor’s right to redeem, the court observed, a debtor “must take certain affirmative steps to change the otherwise dormant right to redeem repossessed collateral into a meaningful ownership interest.”  Lewis, 137 F.3d at 1284. The debtor’s plan proposing to pay the creditor less than the full amount owed, the court concluded, “offered no indication to [the creditor] that the estate had chosen to exercise its right of redemption, that is, to ‘fulfill’ [the debtor’s] secured obligation plus expenses in accordance with Alabama law.” Id. at 1285.

Judge Paul W. Bonapfel recently wrote an opinion (In re Moore) denying the Debtor’s complaint for turnover of her vehicle because she had not properly taken “certain affirmative steps” to redeem her vehicle through the chapter 13 plan.  Judge Bonapfel cited the Eleventh Circuit’s decision (In re Lewis), and noted that the Eleventh Circuit “did not elaborate on what affirmative steps a debtor must take, concluding that the debtor in the case before it had taken no such steps.”  Although the Eleventh Circuit and Judge Bonapfel had the opportunity to provide guidance to Debtors and their counsel – i.e., to tell us exactly what constitutes appropriate affirmative steps – each Court “punted” on the issue, simply stating that the facts of each of those cases did not amount to appropriate affirmative steps.  Now it’s up to us, the Debtors’ attorneys, to test the waters at our own peril.

In light of this framework (or lack thereof), bankruptcy attorneys need to carefully consider whether their client, in conjunction with the terms of the chapter 13 plan, can take the appropriate “affirmative steps” to redeem a vehicle through the chapter 13 plan.

Until the Courts provide more guidance on the definition of “appropriate affimative steps,” I am employing a 3-step process in an attempt to take those appropriate steps to redeem:

(1)  Calendar the client’s redemption deadline, and file the chapter 13 case before it expires.  Failure to do so may have disasterous consequences similar to filing a chapter 13 (to save a home) after the foreclosure date.

(2) Make sure the plan provides for full payment of the title pawn loan, with interest.  Chapter 13 bankruptcy attorneys are programmed to think “ok, it’s not a PMSI, so § 506 applies – I can bifurcate this claim if the vehicle is worth less than the loan balance.”   Although a title pawn loan is rarely under-secured, the Eleventh Circuit did tell us that a cram-down is not an appropriate affirmative step to redeem.

(3)  Make sure to draft the plan properly, and don’t be afraid to use confirmation order as res judicata on the issue of appropriate affirmative steps to redeem.  In that regard, I have used the following plan language whenever I modify a title pawn transaction:


Paragraph 6:

__X___ to the Trustee pending confirmation of the plan or such longer period as may be provided herein below.

REDEMPTION OF PAWNED PROPERTY:  The plan proposes to redeem a ______________________ (‘the vehicle”), which is in the possession of the Debtor(s), but the title is held by _________________ under a title pawn contract.  Debtor(s) shall redeem the vehicle by paying the debt in full through the chapter 13 plan.  Confirmation of the plan shall constitute an affirmative finding that (1) the grace period for redemption has not expired; (2) the vehicle is property of the estate; and (3) that the adequate protection payments below, in conjunction with the post-confirmation payments in paragraph 6(A)(ii), shall constitute appropriate “affirmative steps to redeem” pursuant to the Eleventh Circuit’s decision in Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280 (11th Cir. 1998).


So far, I have not received any objections from the Chapter 13 Trustee, or from the title pawn lenders.  I will update this article when and if any litigation or contested matters arise as a result of my plan provision.

UPDATE: 12/19/11

Last week, the Trustee objected to the aforementioned plan provision, and the matter was argued before Judge Mary Grace Diehl.  Judge Diehl reviewed the plan provision, and confirmed the chaper 13 plan.  See, In re Clemmons, Case No. 11-43004.

–  Brian R. Cahn |


Posted on November 29, 2011, in Bankruptcy and tagged , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink. 1 Comment.

  1. The title pawn over valued my vehicle and my vehicleIs worth at least half of loan value. Also, title pawn made two separate loans on one single car title which is against GA law. In,order for me to redeem vehicle, I was forced to sign an agreement that stated I would not pursue legal action, etc, which is also against GA law. The pawn broker installed a GPS device in my vehicle without my knowledge and I find this a true invasion of my right to privacy. What can I do?

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