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Pawn trading is booming. But pawn shops aren’t just doing business with the working poor. Instead, middle- and high-income borrowers are taking their valuables to pawn shops to generate needed cash for mortgage payments, vehicle loans, school tuition and even essential items like food and clothing. Pawn industry trade magazines have taken note of this trend and more and more pawn brokers are opening locations in high-end shopping centers. Specialty pawn stores now look more like jewelry stores than merchandise-filled pawn shops and they openly solicit wealthy customers. In Atlanta, there is a pawn shop called “The Happy Hawker” that specializes in jewelry and watches that advertises itself as a “pawn shop for the rich and famous”.
Bankruptcy attorneys are also looking into these wealthy borrowers. While changes to the nation’s bankruptcy laws in 2005 typically require wealthier debtors to file Chapter 13, there has been a steady increase in the number of bankruptcy filings by families who have household incomes of $100,000 or more. Not surprisingly, many of these high-income bankruptcy filers have pledged pawn collectibles, jewelry, electronics, watches and family heirlooms in an effort to raise cash. Scared, embarrassed and unsure of how pawn stores operate, these pawn borrowers unnecessarily put their assets at risk if they are not alert to time limits and default provisions.
In most cases, the greatest risk to the mortgagor arises from the default provisions of the mortgage loan. Generally, upon default, the title of the pledged collateral is transferred to the pledge broker. So, in general, if a borrower is thinking about filing for bankruptcy, he or she should file their case before the pawn loan defaults and/or title actually passes.
Although bankruptcy laws are federal laws and apply in every state, pawn shop laws will vary from state to state. In general a bankruptcy court will look to local laws to determine when a pawn loan is in default. Local laws will also set rules about what a borrower needs to do to keep their mortgage loan out of default – usually this means making interest payments.
In most states, a Chapter 13 filing while the pawn transaction is still in progress will preserve the debtor’s ownership in the property. The automatic stay in bankruptcy will prevent the pawn broker from selling the property and the Chapter 13 plan will give the borrower an opportunity to return the pawn loan as a secured debt. The borrower may not get immediate possession of his property, but at least he knows that the property is safe.
Conversely after passing a Chapter 13 title there may not be as much help. In this situation, the pledged goods do not form part of the debtor’s bankruptcy estate and therefore the plan does not include the debt. There is some argument that a shrewd attorney can use the mortgaged property to get back into the bankruptcy estate, but the process is an uphill battle.
As a rule, therefore, pawn borrowers should attempt to file their Chapter 13 cases before their pawn transactions go into default. At a minimum, the mortgagor should seek legal advice prior to default to learn more about applicable state law and local bankruptcy procedures that deal with pawn loans.
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