Vicious Cycle of Payday Loans Stopped by Bankruptcy

Bankruptcy and payday loans are two ways you can try to manage your debt. However, one can lead to the other when you are caught in a vicious cycle of payday loans. You may know how payday loans are supposed to work. You borrow a specific amount of money then repay it plus any fees when within a specific time frame. However, the truth is that payday loans are expensive cash advances that have to be paid in full. Thus, they can be short-term, expensive solutions to financial problems. For instance, you may go to a payday lender, or more than one, each week so you can obtain money for your bills such as rent, utilities or credit card bills. You risk paying higher fees, bouncing checks and getting deeper in debt.

Bankruptcy Can Stop the Need for Payday Loans

When you file personal bankruptcy you have two options depending on your income and amount of debt. Chapter 7 is for people with unstable income and/ an enormous amount of unsecured debt like payday loans, credit card and medical bills. Chapter 7 totally eliminates or wipes out unsecured debts. This means you are no longer responsible for paying back the debts. Chapter 13, however, is for people with stable income and secured and unsecured debt. Under a chapter 13 repayment plan individuals are allowed to pay creditors in three to five years. In other words, if you are trying to save your home and stop payday lenders, you will be able to do so under chapter 13 because you’re paying them back. There is one important not about chapter 13. The bankruptcy trustee, who sends you send your monthly payments to, pays priority and secured claims first. This means that after those debts are satisfied, unsecured creditors like payday lenders are paid—if there’s any money left over. If not, the debts are discharged.

Seek Legal Help

If you are caught up in the vicious cycle of payday loans, you’re not alone. According to Consumer Reports, approximately 10 million American households borrow money from payday lenders each year with first time applicants twice as likely to file bankruptcy within two years. Therefore, it’s best to contact a lawyer about bankruptcy and payday loans. The bankruptcy lawyer will determine which chapter you’re eligible for, file the required paperwork and—most importantly—get you out the vicious cycle of payday loans.