I’m contemplating filing Chapter 13. I really need money immediately for bills. Is it okay to get a car title loan if I may file for bankruptcy soon? I don’t necessarily want the title loan to go into the bankruptcy if I decide to file. I just want to know if it’s okay to do so-legally. Is it frowned upon on in court?

There are so many things wrong with this question that it is difficult to figure out where to start.  First, it is never possible to exclude a debt from bankruptcy.  All debts must be listed. If a balance is owed on the day the case is filed the debt must be listed.  You are signing a document that says “under penalties of perjury I have listed all my debts.”  Title loans must be reported, even if you intend to pay it back.

Is it okay to get a car title loan when you plan to file bankruptcy?

The short answer is no.  It is never permissible to incur debt when you plan on filing bankruptcy.  In fact, when you incur new debt shortly before bankruptcy you cross a line.  Creditors may object to the bankruptcy discharge if they can prove you knew you were going to file bankruptcy when he debt was incurred.  Once you meet with an attorney about filing bankruptcy, stop all use of credit.

Do I have to repay Title Loans after bankruptcy?

As a general rule, bankruptcy wipes out debts but not liens.  So, in many cases you must pay off the title loan to keep the vehicle. However, there is a special exception.

If your vehicle is used in your business or trade beyond merely traveling to and from work, the title loan lender will probably have to release its title lien.  For example, if you must use your vehicle to deliver supplies or meet customers or perform any other job function, then a special Tool of the Trade Rule comes into play that can void title loans.

For this reason, if you have a car title loan it is very important to tell your bankruptcy attorney how the vehicle is used on the job beyond merely traveling to and from work.

Chapter 13 allows a debtor to pay back car title loans at 5.25%.

File Chapter 13 to Rewrite the Title Loan.

Unlike a chapter 7 case, Chapter 13 allows a debtor to rewrite the terms of a the title loan.  Most title loans come with steep interest rates of 300% to 400%.  Chapter 13, however, allows a debtor to pay back car title loans at 5.25%.  (The rule in Chapter 13 is that secured debts must be repaid at Prime Rate (currently set at 3.25%) plus 2%.)

If you have questions about title loans in bankruptcy, contact our Nebraska bankruptcy attorneys for more information.

Image courtesy of Flickr and Sleep.

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