The pawn business is booming. But pawn shops don’t just do business with the working poor. Instead, middle- and upper-income borrowers are bringing their valuables to pawn shops to generate the cash needed for mortgage payments, vehicle loans, school fees, and even essentials like food and clothing. Trade magazines in the pawn industry have picked up on this trend and more and more pawn shops are opening high-end mall locations. Specialty pawn shops now look more like jewelry stores than stock-packed pawn shops and openly solicit wealthy customers. In Atlanta, there is a pawn shop called “The Happy Hocker” that specializes in jewelry and watches and advertises itself as the “pawn shop for the rich and famous.”

Bankruptcy attorneys are also looking at these wealthy borrowers. While the 2005 changes to the nation’s bankruptcy laws generally require wealthy debtors to file Chapter 13, there has been a steady increase in the number of bankruptcy filings from families with household incomes of $ 100,000 or more. . Not surprisingly, many of these high-income bankruptcy filers have committed to pawning collectibles, jewelry, electronics, watches, and family heirlooms in an effort to raise cash. Scared, embarrassed, and unsure about how exactly pawn shops work, these pawn borrowers unnecessarily risk their property if they are not vigilant about deadlines and default provisions.

In most cases, the greatest risk to a pawn borrower arises from the default provisions of the pawn loan. Generally, in the event of default, title to the pledged collateral is transferred to the pawn broker. Therefore, in general, if a borrower is considering filing for bankruptcy, they should present their case before the pawn loan becomes delinquent and / or before the title passes.

Although bankruptcy laws are federal laws and apply in all states, 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 the rules for what a borrower must do to keep their pawn loan out of default; Usually this means offering an interest payment.

In most states, a Chapter 13 filing while the pawn transaction is still in effect will preserve the debtor’s ownership of the property. The automatic stay of bankruptcy will prevent the pawn broker from selling the property and the Chapter 13 plan will give the borrower the opportunity to repay the pawn loan as a secured debt. The borrower may not take possession of your property right away, but at least he knows that the property is secure.

Conversely, Chapter 13 may not be of much help after the title has passed. In this situation, the pawned merchandise does not become part of the debtor’s bankruptcy assets and therefore the loan is not included in the plan. There are some arguments that a smart attorney can use to return pledged property to the bankruptcy estate, but this process is an uphill battle.

Therefore, as a general rule of thumb, pawn borrowers should try to file their Chapter 13 cases before their pawn transactions go into default. At a minimum, the pawn borrower should seek legal advice prior to default to learn more about applicable state law and local bankruptcy procedures dealing with pawn loans.