Consumers Beware: This Legal Change Is Allowing One Lender to Charge Triple-Digit Interest Rates

As much as car title and payday loan companies try to deny it, theirs are two of the most predatory loans in the U.S. Their loans are designed to prey upon the poor, trapping them into an endless cycle of debt. There are nearly 500 title loan storefronts in Georgia, disproportionately located in low-income areas and minority communities. While it's easy to identify the "bad guys" in this scenario, you may be surprised to learn that two states have made it easier for loan companies to charge an annual interest rate of 300% and leave customers with nothing.

A huge loophole for lenders

In Georgia and Alabama, car title loans are typically referred to as "title pawns." That's because the title lending industry in those states operate under pawn shop statutes. According to ProPublica, since title lenders are categorized as pawn shops, the vehicles used as collateral by borrowers are considered pawned property and are automatically forfeited once the borrower defaults on the loan.

In an effort to avoid repossession of their vehicle in other states, a borrower may turn to bankruptcy. That's because once a person files for bankruptcy protection, their car cannot be taken from them. However, the same is not true in Georgia or Alabama when a title loan is involved.

A 2017 legal ruling found that because title lenders in Georgia operate under state pawn shop statutes, they can get around the protections available to debtors in Chapter 13 bankruptcy. In its judgment, the 11th U.S. Circuit Court of Appeals in Georgia wrote, "The pawnbroker didn't have a mere 'claim' on the debtor's car -- it had the car itself."

In other words, a borrower can attempt to protect their vehicle from repossession by filing for bankruptcy protection, but they are unlikely to be successful. ProPublica reviewed the cases of 81 people who owed money on a title loan to TitleMax and another lender. Each borrower had filed for Chapter 13 bankruptcy. In more than 70% of the cases, TitleMax was able to get its debt excluded from repayment plans. This allowed TitleMax to seize the vehicles or otherwise recoup the entire amount due.

From loan to bankruptcy

Afraid they can't qualify for a traditional loan but desperate for money, a borrower visits a title pawn office and puts their vehicle up as collateral. If they can't make the payments as agreed, they must take out a new title loan to pay off the old balance. Each time they take out a new loan, fees accrue and their balance climbs. If, at any point, a borrower simply cannot make the payment, the title pawn company repossesses their vehicle.

The two most common types of bankruptcy in the U.S. are Chapter 7 and Chapter 13. Here's how they differ:

• Chapter 7: Calls for borrower's assets to be sold to pay creditors. Almost everyone who files for Chapter 7 gets at least some of their debts discharged. Attorney fees are normally paid before filing.
• Chapter 13: Called a "wage earner's plan." Chapter 13 allows a debtor to keep more of their property and gives them from three to five years to repay their existing debts. Many attorneys will file a Chapter 13 case for little or no money upfront. Instead, the debtors repay them over the course of the court-approved repayment plan.

It may come as no surprise that Chapter 13 is quite popular in Georgia. In fact, over the past 10 years, Georgia has had the highest number of Chapter 13 cases in the country. With an average of 23,000 Chapter 13 filings per year, the same folks targeted by predatory loan companies often end up filing for bankruptcy protection.

If they lived in another state, borrowers might find relief through bankruptcy court. However, those who borrow from title pawn shops in Georgia and Alabama may end up paying 300% interest rates, file for bankruptcy, and still lose their vehicle.

If you're in need of money, your best bet is to find alternative loan sources. Title loan companies and payday lenders are rarely (if ever) a good idea.