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

Bankruptcy attorneys are also looking at these wealthy borrowers. Although 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 exactly how pawn shops work, these pawnbrokers needlessly risk their property if they are not vigilant about time frames and predetermined 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 a default, title to the collateral is transferred to the pawnbroker. Therefore, in general, if a borrower is thinking of filing for bankruptcy, they should file their case before the lien loan defaults and/or before the title actually passes.

Although bankruptcy laws are federal law and apply in all states, pawn shop laws vary from state to state. In general, a bankruptcy court will look to local laws to determine when a pawn loan is delinquent. Local laws will also set the rules for what a borrower must do to keep their pawn loan out of default; This usually 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 in bankruptcy will prevent the pawnbroker 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 his property right away, but at least he knows that the property is safe.

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

As a rule, therefore, pawn borrowers should try to file their Chapter 13 cases before their pawn transactions go into default. At a minimum, the pawnbroker should seek legal advice prior to default to learn more about applicable state law and local bankruptcy proceedings dealing with pawn loans.