Payday Loans and Bankruptcy

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In a Nutshell

Payday loans are short-term loans with very high interest rates that are due on the borrower's next payday. Learn how bankruptcy can help you get out of the impossible cycle created by payday loans.

Written by Attorney Jenni Klock Morel.  
Updated September 3, 2020


Payday loans can trap you in a vicious circle of borrowing against future income to pay bills today. The cost of these loans adds up quickly because of high interest rates. If you don’t pay them off per the terms of the loan, payday loan debt can also land you in court for unpaid debts. If you’ve got a debt challenge tied to payday lenders, filing for bankruptcy may provide you with the debt relief you need. 

What are Payday Loans?

Payday loans are unsecured loans that usually have high interest rates. “Unsecured” means they are not attached to collateral, unlike car loans and home mortgages which are secured by a lien against the property. Payday loans are usually short-term loans that are due within 2 to 4 weeks when you get your next paycheck or on a scheduled date you’ll receive income from another source, such as Social Security. Payment may be made in writing a post-dated check or giving the payday lender authorization to electronically debit payment directly from your bank account. Depending on state law, payday lenders might be capped on how much they can lend in payday loan debt. State laws may also dictate whether payday loan companies are allowed to have a storefront or operate online.  

People often struggle to pay back payday loans because of their high interest rates and other fees. Payday lending can often trap people living paycheck to paycheck in a cycle of continually taking out payday loans to make ends meet today. Because these short-term loans are so expensive, this becomes a costly way to live – especially if you’re already strapped for cash before your next paycheck. 

A payday loan begins as an unsecured debt but can be converted into secured debt. If you don’t pay back your payday debt, the payday lender can hire a law firm to file a debt collection lawsuit against you. The lawsuit can result in the payday lender obtaining a judgment, which gives them access to significant debt collection methods including wage garnishment, bank levy, or securing a lien against your property. A lien against property operates as secured debt and can’t be erased easily through bankruptcy the way many unsecured debts, like credit card debts, can be. 

Using the FDCPA to protect yourself against payday lenders

The Fair Debt Collection Practices Act (FDCPA) is federal law in place to protect you from abusive debt collection practices. The FDCPA protects you from abusive, misleading, or harassing tactics by debt collectors. A debt collector is any party who contacts you other than the original creditor. Debt collection agencies hired by payday lenders must adhere to the FDCPA.

Even if you’ve taken a loan out and have fallen behind on your payments, it’s illegal for a debt collector to harass or threaten violence against you. It’s illegal for a debt collector to threaten to put you in jail for unpaid debts. Debt collectors can’t use profane or abusive language toward you. They can’t harass you with multiple phone calls or text messages and they’re only allowed to contact you between 8:00 a.m. and 9:00 p.m. A debt collector can’t continue to call you after you’ve told them, in writing, that you don’t want them to contact you anymore. Also, a debt collector must give you the contact information of the original creditor when they first contact you or in writing within 5 days of initial contact. This step provides you with the information you’ll need to verify whether or not you owe the debt in question. 

How bankruptcy can provide debt relief from payday loans

As soon as you file a bankruptcy case, the automatic stay takes effect, which is a provision of the Bankruptcy Code that makes it illegal for your creditors to continue collection efforts against you until your case is resolved or dismissed. The automatic stay puts an immediate end to payday loan collections, lawsuits for unpaid debts, and all other collection activity from creditors. The automatic stay is fully enforced by the bankruptcy courts. 

Individuals and families most often file Chapter 7 bankruptcy or Chapter 13 bankruptcy. Both of these chapters can provide debt relief from payday loans. The majority of people get to keep all or most of their assets through the bankruptcy process. Depending on your financial situation, filing for bankruptcy may be a good option to handle your debt problems with payday loans, credit card debt, and other debts. 

Chapter 7 bankruptcy is the simplest form of bankruptcy and, from the date of filing, usually takes about 4 months to completion. Chapter 7 has the power to erase certain types of debts forever. Debts that can be erased by bankruptcy are called dischargeable debts. Most payday loans are dischargeable. Other common types of dischargeable debts include credit card debts, medical bills, personal loans, and overdue utility bills. At the end of a successful Chapter 7 case, the bankruptcy court will issue a bankruptcy discharge order. This is the court order that erases your obligation to pay back your dischargeable debts listed in your bankruptcy filing. You’ll never have to pay back payday loans discharged in bankruptcy and the payday lender will be forever barred from trying to collect the debt from you as well.

By contrast, a Chapter 13 bankruptcy is a reorganization of debts and creates a 3 to 5 year repayment plan. You may pay back all, most, or some of your debts through your Chapter 13 payments. Chapter 13 allows you to pay off your non-dischargeable debts. Any balances on payday loans will be erased at the end of a successful Chapter 13 when the bankruptcy court enters the bankruptcy discharge order. Similarly to Chapter 7, you’ll never have to pay back payday loans that were discharged in your bankruptcy. 

It’s generally a good idea to wait at least 90 days after taking out a payday loan before filing for bankruptcy. Payday loans or a cash advance taken out within 90 days of filing for bankruptcy can create problems. A payday lender could file an adversary proceeding with the bankruptcy court challenging the dischargeability of the payday loan debts you owe them. This means that the bankruptcy court could find that you had no intention of paying back the loan and it can rule the debt nondischargeable – meaning you would have to pay back the payday loan debt even after bankruptcy. If you wait 90 days after your last payday loan before filing for bankruptcy, you’re likely to avoid this possibility. 

Conclusion

Routinely taking out payday loans can spiral into a debt problem that requires a long-term solution. Chapter 7 and Chapter 13 bankruptcies can provide relief from payday lenders. Filing for bankruptcy is a powerful legal tool to stop collection activity, although it isn’t the best solution for everyone. If you don’t have enough money to pay your debts, it’s time to consider your debt relief options. A good place to start is by scheduling a free credit counseling session and meeting with a bankruptcy lawyer for a free consultation. If you choose to file for bankruptcy, know that Upsolve offers a free tool to help you file bankruptcy on your own. 



Written By:

Attorney Jenni Klock Morel

LinkedIn

Jenni Klock Morel is a writer, nonprofit leader, and Social Justice Law Scholar. For years she practiced consumer bankruptcy law exclusively as a debtor's attorney, helping individuals and families file for Chapter 7 or 13 bankruptcy protection. Jenni left the practice of law to... read more about Attorney Jenni Klock Morel

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