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Can bankruptcy help with payday loans?

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In a Nutshell

Filing for Chapter 7 triggers the Automatic Stay which prevents the payday loan company from trying to collect the debt. If it is later discharged, you are no longer obligated to pay it back.

Written by Attorney Jonathan Petts.  
Updated August 13, 2020

Sometimes waiting for the next paycheck is not realistic when you have bills that need to get paid today. Payday loans are a quick and easy way for many people to get money when they need it fast. However, there are downsides of payday loans that can quickly cause financial hardships for a person in the long run.

Let’s look at payday loans and how these types of debt are handled in a Chapter 7 bankruptcy filing.

What is a payday loan?

Payday loans are often used when someone needs cash fast. They are also known as cash advances, paycheck advances, or check advances.

In reality, check advance loans are short-term loans. The loans usually have extremely high-interest rates, so you pay much more back to the company than you borrowed.

Many companies require you to write a personal check for the amount to pay off the paycheck loan when you obtain the loan. The check is dated for the date you receive your next paycheck. The company deposits your personal check on that date.

What are my options if I can’t pay back my payday loan?

Refinance. If you have a check advance loan that you cannot pay, the company may allow you to “refinance” the loan. However, extending a payday loan comes at a very high price. The company often charges expensive fees for refinances and may increase the interest charged on the loan.

Bankruptcy. Filing a Chapter 7 bankruptcy case can wipe out a payday loan. Even if the company includes a statement that the debt is not dischargeable, or “erase-able,” in bankruptcy, this is typically not true. More on this below.

How does bankruptcy affect my Payday loan?

Payday loans that are personal unsecured loans can be wiped out in your Chapter 7 case. They often become unsecured debts when you write a “bad check.” This “bad” check just means that the check you wrote when you got your payday loan, but didn’t have enough money in your account when the company deposited it.

When you fail to pay, this loan becomes a debt with pretty high interest. The longer you take to pay it, the more expensive it becomes.

Filing for Chapter 7 triggers the Automatic Stay which prevents the loan company from trying to collect the debt. If it is later discharged, you are no longer obligated to pay it back.

What are the downsides of filing for bankruptcy because of a Payday loan?

  • Recent payday loans are not dischargeable. If you take out a payday loan within 90 days of filing a bankruptcy case, the lender may be able to enforce the loan. The law presumes you were thinking about filing or preparing to file a Chapter 7 bankruptcy case for a few months before filing the case.

    Therefore, if you take out a loan knowing you are going to file bankruptcy, you committed fraud.To avoid this problem, it is usually best to wait at least 91 days after obtaining a loan before filing Chapter 7.

  • Loan company may object. The loan company may object to the discharge of the debt for a variety of reasons. You must respond to any objections that the company may file with the court.

Post-Bankruptcy Effects. After you file, your credit score will temporarily go down, and you may be offered loans with higher interest rates for a few years. If you have a lot of property, you could lose some of that property in a Chapter 7 bankruptcy (this is not an issue for most people).

Chapter 7 can get rid of the debts you cannot pay. In most cases, debtors get rid of all unsecured debts without losing any of their property.

Is Filing Chapter 7 Worth It?

For many people, filing a bankruptcy case gives them a fresh start, free from the burden of debts they cannot pay. However, bankruptcy is not right for everyone.

If you are still unsure about filing a Chapter 7 bankruptcy case, you may want to talk with a bankruptcy attorney. An attorney can help decide if bankruptcy is right for you.

Written By:

Attorney Jonathan Petts


Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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