Last updated May 30, 2017.
Payday loans are a common issue in bankruptcy filings. You borrow in order to pay off other debts with the intention of repaying the loan with your next paycheck. Then the payday lender takes its cut and you can’t afford to pay your bills the next month. So, you go back to the payday lender and end up in a cycle of high-interest borrowing. In combination with your other debts, that cycle can easily spiral out of control. Now you’re considering filing for bankruptcy to get your finances back on track.
Will bankruptcy wipe out your payday loan? Let’s take a look below at how payday loans work, how its lenders are regulated, and how to file bankruptcy on a payday loan.
How do payday loans work?
A payday loan is a short-term, unsecured loan that usually comes in the form of a cash advance for money that you’ll be getting soon. For example, your payday is a week away, but you need money to pay bills now. Payday lenders in California will give you immediate cash, but they charge a huge premium for the convenience.
You can get a payday loan based on your employment history, rather than your general credit history. People usually turn to payday loans in an attempt to make ends meet. Because people who take out quick cash loans are usually both less-than-creditworthy and in immediate need of money, payday loans usually carry extremely high rates of interest. That can make it very difficult to repay these loans. If you’re seeking a loan to make ends meet because your paycheck wasn’t enough this month, the odds that you’ll have extra next month to repay it are very low. This keeps borrowers in a constant struggle against mounting interest. The effect is often mounting debt.
Payday lenders are often regulated by the states because they prey on consumers who have run out of options. However, consumers continue to turn to payday loans as a lender of last resort. If you’ve accumulated payday loans, bankruptcy may help you escape the weight of payday debt.
To read more about payday loans, check out this article.
Payday Loans and Bankruptcy
Payday loans are considered unsecured debt. Generally, whether you file under Chapter 7 or Chapter 13, unsecured debt is dischargeable in bankruptcy. That’s good news for you. Of course, payday lenders aren’t going to give up so easily. They’ll object to your discharge, claiming that you took out the loan without any intention of paying it back. If you took out a payday loan immediately before filing for bankruptcy, they may have a case in court.
Tips for Discharging Your Debt
To make sure your payday loans are discharged through your bankruptcy, don’t file immediately after taking a payday loan. The bankruptcy trustee will take a careful look at loans and purchases within the 70 to 90 days prior to filing for bankruptcy. The court wants to make sure you’re not taking out loans or making large purchases with no intention of repayment and then using bankruptcy as a way to get out from under the debt. Wait at least three months after you take a payday loan before filing for bankruptcy.
Fortunately, courts generally disfavor payday lenders. In some cases, courts will consider the start date of your payday loan to be the day you took out your first payday loan from that lender, rather than your most recent one. That may push you back beyond the 90-day threshold. Even if the court decides that your loan falls within the 90-day window, the payday lender will have to prove that you took out the loan with fraudulent intent. It’s a tough case for them to prove and the court is already biased in your favor.
Beware of Post-Dated Checks, Lending Fraud
If you left your payday lender a postdated check, they may still try to cash that check after you’ve filed for bankruptcy. Generally, that’s considered a violation of the automatic stay and the lender may be liable to you for damages. However, the litigation process often takes more time and money than bankruptcy filers have. If you gave your lender a post-dated check and later filed for bankruptcy, notify you attorney, your bank, and your bankruptcy trustee immediately. Depending on the fees your bank charges and the number of post-dated checks you have outstanding, you may want to simply pay the stop-payment fee on the checks and prevent the issue from arising at all.
Payday lenders will often represent to borrowers that a post-dated check that doesn’t go through is the same as writing a bad check, which is a criminal offense. That simply isn’t true — it’s just a scare tactic. If you file for bankruptcy, you can cancel the check before the lender cashes it. If the lender has already cashed it, you can demand the return of the money to your bankruptcy estate. You don’t need to worry about any criminal repercussions.
In addition to the dangers of falling into the payday lending debt trap, some payday lenders also are defrauding customers. They set up fake payday lending websites and ask customers to pay fees upfront — then they disappear. It’s illegal to charge an up-front fee for lending, so that should be a red flag. Many of these fraudulent operations are highly sophisticated, with believable websites and working phone numbers. They’ll frequently ask for cash cards or wire transfers rather than trackable payment methods. Beware these scammers and never make an anonymous payment online or over the phone.
Get Help Discharging Your Payday Loans
If you’re struggling with debt, remember that payday loans are dischargeable in bankruptcy. Payday lenders may be very aggressive and often use misleading advertising, but bankruptcy will stop them in their tracks. Of course, the decision to file for bankruptcy is a serious one. Talk to an experienced attorney about your situation and your options to determine if bankruptcy is the best option for you. Contact us today for a free consultation.
Barry Edward Borowitz is the founding partner of Borowitz & Clark, LLP, a leading bankruptcy law firm that represents clients petitioning for bankruptcy protection under Chapter 7 and Chapter 13 of the bankruptcy code. Mr. Borowitz has been practicing bankruptcy law exclusively for more than 15 years. View his full profile here.