A lot of people take some desperate measures to try to keep the bills paid—including pawning sentimental pieces of jewelry or other valuables. That can end up causing a few difficulties later, however, if those items are still in pawn when you decide to file Chapter 7 bankruptcy. Here's what you should know about bankruptcy and pawned property.

Do you have to tell the bankruptcy trustee about the items in pawn?

Yes, you do have to disclose the fact that you have items in pawn, because you still have ownership interest in them until the point where you default on the pawn and ownership of the items transfers to the pawnshop. 

This puts the pawnshop in a bit of a tricky situation as well, because an automatic stay goes into place the moment that you file your bankruptcy petition that stops creditors from taking further action on your debts for the time being, including foreclosing on secured property loans—like pawned items.

What happens to the items in pawn?

Reforms to the Bankruptcy code in 2005 specifically carved out the rules for how pawned items are to be handled. This was because, prior to that point, pawnbrokers were caught in a loop where they potentially had to temporarily return your items to you until the bankruptcy was settled. You're given the longer of either the 60 days established by federal Bankruptcy Code section 108(b) or any time limit established by state law to redeem the items from pawn before the pawnbroker is allowed to move forward with foreclosing on the loan and taking full ownership of the items.

What does this mean in practical terms?

In practical terms, you have to come up with the full amount of the pawn within the 60 day period (or the longer term established by your state's laws) in order to redeem your items. You cannot simply pay the interest on the pawn as usual in order to keep the pawnshop from taking possession. That may be very difficult to do, given your financial state when you file for bankruptcy. If you are able to redeem the item from pawn, you have to make sure that your attorney and the bankruptcy trustee is aware that you have regained possession of it.

At that point, you may have to turn the item over to be sold to repay some of your debts, depending on whether or not the item can be exempted. For example, if the item was your wedding ring, that is usually exempt from seizure by the bankruptcy court. On the other hand, if the item was your great aunt's ruby ring, that might not qualify for an exemption and may have to be turned over to the court.

What else can happen?

Even if you have no plans or ability to redeem the item you have in pawn, the trustee of your bankruptcy also has the option of redeeming your pawn—which might happen if the item is particularly valuable and worth much more than the loan you have against it. If that happens, you can generally guarantee that the trustee has determined that it doesn't meet any exemptions and it can be sold to satisfy some of your debts.

It's generally much wiser to talk to a bankruptcy attorney before you start putting items in pawn in order to try to meet your bills. If you've reached that state, and it isn't an unusual, one-time emergency, consider contacting a bankruptcy attorney today to discuss your situation. Visit websites like http://www.tblakelaw.com to learn more.