In some cases, bankruptcy can help borrowers who have payday loans they can't repay. Filing for Chapter 7 bankruptcy triggers an automatic stay, which prevents the payday loan company from trying to collect the debt. If the debt is later discharged, you are no longer obligated to pay it back.
Written by Attorney Jonathan Petts.
Updated October 4, 2021
Sometimes waiting for the next paycheck is not realistic when you have bills you need to pay today. Payday loans are a quick and easy way for many people to get money when they need it fast. But there are downsides. Payday loans can cause financial hardships in the long run.
Let’s look at payday loans and how payday loan debt is 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 payday lender than you borrowed. Many companies require you to write a post-dated check in the amount of the payday loan when you obtain the loan. The check is dated for your next payday. The company then deposits your personal check on that date.
What Are My Options if I Can’t Pay Back My Payday Loan?
If you take a payday loan and are unable to back it back, you can try to refinance the loan or consider filing bankruptcy.
Refinance: If you have a check advance loan that you cannot pay, the company may allow you to refinance or extend the loan. But this often comes at a very high price. Payday loan companies often charge expensive fees to refinance, and doing so 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 erasable in bankruptcy, this is typically not true. We'll touch on this more below.
How Does Bankruptcy Affect My Payday Loan?
Filing Chapter 7 bankruptcy can wipe out unsecured loans and provide debt relief for borrowers who are struggling financially. Payday loans become unsecured debts when you write a bad check. This just means that you didn't have enough money in your bank account when the payday lender deposited your post-dated personal check. Because payday loans come with high interest rates, the longer you take to pay them, the more interest they accumulate and the more expensive they become. This can mean your debt becomes unmanageable very quickly.
Filing for Chapter 7 triggers an automatic stay, which prevents payday loan companies and all other creditors from trying to collect on their debts. If the payday loan 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?
While filing for bankruptcy may help you deal with a payday loan you can't repay, there are also some downsides. For one, 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. Bankruptcy law presumes you were thinking about filing or preparing to file a Chapter 7 bankruptcy case for a few months before filing the case. If you take out a loan knowing you are going to file bankruptcy, you've committed fraud. To avoid this problem, it is usually best to wait at least 91 days after obtaining a loan before filing Chapter 7.
Another drawback is that the payday lender may object to the discharge of the debt for a variety of reasons. You must respond to any objections that the company files with the bankruptcy court. Finally, filing bankruptcy for any reason will affect your credit score. It 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 because of exemptions.
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?
Filing a bankruptcy case gives many people the debt relief they need to get a fresh start, free from the burden of debts they cannot pay. However, bankruptcy is not right for everyone. It's best to consider the pros and cons of the bankruptcy process before deciding. You can file a Chapter 7 case on your own for free using Upsolve's free tool.
If you are still unsure about filing a Chapter 7 bankruptcy case, you may want to talk with a bankruptcy lawyer. An attorney can help decide if bankruptcy is right for you, and they often offer a free consultation.
Payday loans are an easy way to get cash fast, but they often come with long-term consequences. Because the interest rates for these loans are so high, if you have difficulty repaying them you can quickly find your debt unmanageable. You may be able to refinance your payday loan but this often comes with fees and may even raise your interest rate, putting you further behind. Filing Chaper 7 bankruptcy is another way to get debt relief if you're struggling to repay payday loans and having other financial difficulties. A free consultation with an experienced bankruptcy attorney can help you decide if this is the right choice for you.