Can I Get a Title Loan While in Chapter 13?

Chapter 13 bankruptcy provides individuals with a structured repayment plan to address their debts, typically spanning three to five years. During this period, debtors make regular payments to a bankruptcy trustee who then distributes funds to creditors. Incurring new debt while in a Chapter 13 bankruptcy is generally restricted and almost always requires explicit approval from the bankruptcy court.

Restrictions on Incurring New Debt in Chapter 13

A fundamental principle of Chapter 13 bankruptcy is the debtor’s commitment to a court-approved repayment plan. This plan outlines how disposable income will be used to pay creditors over the three-to-five-year duration. Introducing new debt without court permission can jeopardize this established plan and the debtor’s ability to fulfill their financial obligations. The bankruptcy court maintains supervision throughout the plan to ensure its feasibility and to protect the interests of all creditors.

The bankruptcy trustee plays a central role in overseeing the Chapter 13 plan. Taking on new debt without approval can disrupt the trustee’s administration of the case and potentially lead to objections from creditors or even dismissal of the bankruptcy case. All assets, including vehicles, are part of the bankruptcy estate and remain under court control during the Chapter 13 period, necessitating approval for any new liens or significant financial transactions involving them.

Specific Considerations for Title Loans

Title loans present particular challenges within the Chapter 13 framework. These short-term loans typically carry very high interest rates, often ranging from 100% to over 300% Annual Percentage Rate (APR). Such exorbitant costs can make it difficult for a debtor to manage alongside their Chapter 13 plan payments, potentially destabilizing the repayment plan.

Title loans require the debtor to use their vehicle title as collateral, creating a new lien on an asset that is part of the bankruptcy estate. Granting a new lien on a vehicle requires specific court authorization. The court would scrutinize how this new debt and lien might affect the existing payment plan or the valuation of assets within the bankruptcy. Title loans also typically have very short repayment terms, often 30 days, which conflicts with the multi-year structure of a Chapter 13 plan.

The court’s criteria for approving new debt are stringent, generally requiring a demonstration of necessity, a lack of other viable options, and a clear benefit to the debtor’s ability to complete their plan without detriment to creditors. Due to their high cost and short repayment periods, title loans rarely meet these requirements. The court’s primary concern is the successful completion of the Chapter 13 plan and the equitable treatment of all creditors.

Seeking Court Authorization for New Credit

For a debtor in Chapter 13 to incur new credit, a formal process involving the bankruptcy court must be followed. This begins with filing a “Motion to Incur Debt” or a similar legal pleading with the court. This motion is a formal request seeking judicial permission to take on the new financial obligation while the repayment plan is active.

The motion must provide detailed information to the court, including the specific purpose of the proposed loan, its exact terms such as the interest rate, the total amount, and the repayment schedule. It must also demonstrate how incurring this new debt will not negatively impact the debtor’s ability to make their Chapter 13 plan payments or harm the interests of existing creditors. The debtor is required to notify the bankruptcy trustee and all creditors about the motion, allowing them an opportunity to review and potentially object to the request. In some instances, a court hearing may be scheduled where the debtor must present a compelling case for the necessity and manageability of the proposed new debt.