Should I pay off my girlfriend’s title loan on her car before she files bankruptcy?

No.

Under Utah law, I can protect up to $3,000 of equity in a vehicle with your name on the title.  If the car is worth more than $3,000, you may lose it or have to “buy back” the equity from the bankruptcy trustee by making a payment for the value of the car over $3,000.  However, if you have a loan against the car. that sucks up the equity, and you usually don’t have to pay the trustee to keep your car.

Today I received a call from a couple where she had a car worth $10,613.  She had just taken out a title loan for $6,000 with an interest rate of 215%.  The boyfriend wanted to pay off that title loan before she filed bankruptcy.  If he paid it off, she would own a car worth $10,613 free and clear.  When she filed bankruptcy, I could protect $3,000.  The chapter 7 trustee would then demand that she pay him the unprotected $7,613 or turn over the car to his auctioneer.

If we left the title loan intact, we could file the case and reaffirm (keep) the title loan.  $6,000 title loan = $3,000 = $9,000 protected.  Then, she would only have $1,613 left exposed in the car.  The trustee would take payments on this $1,613 instead of demanding the car.

He then wanted to know what would happen if he paid it off and she transferred the title to him.  This is bad.  This would be a fraudulent transfer for no value.  The trustee would discover this when he ran a TLR (title search).  He would then deem this a fraudulent transfer and sue the boyfriend for the title to the vehicle.

On the other hand, the boyfriend could buy the vehicle from her and pay off the title loan in the process.  However, he would have to buy it for close to fair market value, money would have to pass hands, and then she would have to spend it all before we filed the bankruptcy.  Even then the trustee may look at this transfer to determine if it was a fair or “arms-length” transaction.

Short answer:  don’t pay off secured loans before you file bankruptcy.  It exposes the equity in the collateral to the trustee’s grasp.