The Truth About "Pay Day" Loans and Filing for Bankruptcy
Debtors may be Eligible for Relief from Payday Loans in Bankruptcy
For those who are struggling to pay their bills and who are falling behind on monthly payments, payday loans may seem like an appealing option. Payday loans, also known as cash advances, check advances, or paycheck advances, are short-term loans offered at a high interest rate. They are designed to help the borrower meet his or her financial burden until the next pay day.
When people who are already struggling to keep up on monthly payments begin relying to heavily on payday loans as a source of instant cash, their financial situation can become dire very quickly. It is not uncommon for borrowers to begin by making use of payday loans and wind up filing for bankruptcy.
Payday Loans in Bankruptcy
Borrowers are then left wondering how payday loans will be treated in bankruptcy. Most payday loans are unsecured debt, and, as a general rule, they are treated like other unsecured loans in bankruptcy proceedings and simply discharged.
A Chapter 7 bankruptcy allows a debtor to discharge debts without repayment, and virtually all unsecured debt is dischargeable. When filing for Chapter 7 bankruptcy, the payday loan must be listed on the bankruptcy petition as unsecured debt. In Chapter 7 bankruptcy, the payday loan is likely to be discharged, since it is not secured and is not considered a priority debt.
Learn more about Debts that are Discharged in Chapter 7 Bankruptcy.
In a Chapter 13 bankruptcy, the court will require the borrower to repay debt using a court-structured repayment plan. Payday loans will be treated as any other unsecured debt and may be included in the repayment plan, allowing the debtor to repay creditors over a period of time from future income. A debtor may be able to discharge part of the payday loan under a hardship provision if he or she is unable to complete the repayment plan.
Learn more about Unsecured and Secured Debts in Chapter 13 Bankruptcy.
Know your Rights
It is important for borrowers to know their rights because lenders do and are more than eager to take advantage of unsuspecting borrowers. Payday lenders frequently include a disclaimer in the paperwork asserting that the loan is not dischargeable in future bankruptcy proceedings. This statement is a scare tactic and has no basis in law. Payday loans like any other personal unsecured loans can be fully dischargeable in a bankruptcy proceeding.
Bankruptcy is intended to give the debtor a fresh start and is not meant to provide a means for debtors to deceive creditors by discharging debts they had no intention of repaying. As such, bankruptcy laws provide that any debt that was acquired within 60-90 days prior to filing for bankruptcy is not dischargeable. There is an underlying assumption that any loan acquired in the period immediately before the debtor filed for bankruptcy was taken out in anticipation of bankruptcy and that the debtor had no intention of repaying the loan.
This is problematic for payday loans, since many borrowers use payday loans as a last resort to avoid going into bankruptcy. Payday loans also cause particular challenges for debtors in bankruptcy proceedings because of the fact that they are short term loans which are set to automatically renew every month if they are not paid. Therefore, payday lenders in bankruptcy proceedings often object to the inclusion of payday loans, arguing that the loan, even if it was originally secured over a year ago, was accrued within the last 60-90 day period in contemplation of bankruptcy and therefore, is not dischargeable.
Because of the usurious nature of payday loans, courts consider them abusive and tend to favor the debtor in such situations. They are often willing to look to the original date of the payday loan, rather than the last date of renewal, so as to include the payday loan on the list of dischargeable debt.
Protect Your Interests
The dangers of payday loans may not end upon filing for bankruptcy. Payday lending practices generally require the debtor to provide a post-dated check or checks that include the amount of principal plus interest. This means that even after the debtor has filed for bankruptcy, the lender remains in possession of the debtor’s personal check, which the lender may try to cash immediately to recover as much as possible before the bankruptcy hearing.
While the lender is prohibited by law from taking any funds once he or she is informed of the bankruptcy proceeding, a recent federal appellate panel decided that lenders are entitled to cash post-dated checks, but will likely be required to return the money in the bankruptcy proceeding. Even though courts will likely demand return of the funds, the debtor will be liable for any overdraft fees and will have limited funds for other needs while the bankruptcy proceeding is pending. As such, debtors may wish to take measures to protect their financial interests, including closing their bank account or paying the stop payment fee on any checks made payable to the lender.
Learn more about How Different Debts are Treated in Bankruptcy.