The Truth About "Pay Day" Loans and Filing for Bankruptcy

Payday loans—including cash advances and deferred presentment service transactions—are high-interest, short-term loans that help borrowers meet financial burdens until the next payday. Because payday loans fall into the same debt classification as credit card balances, you can erase or "discharge" them in bankruptcy. However, if a payday loan breaks the "presumptive fraud" rules, you could remain responsible for paying it.

When Bankruptcy Will Erase Payday Loans

Here's how to erase payday loans when presumptive fraud isn't at issue.

Payday Loans in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, filers erase qualifying debts without repaying creditors. After completing the Chapter 7 process, which takes about four months, you won't be responsible for the payday loan and other dischargeable debts.

Warning. In your jurisdiction, the lender might be able to cash a post-dated check given to pay a payday loan even after bankruptcy and forward the funds to the bankruptcy trustee for creditor payment. Talk to your bankruptcy lawyer about what to expect and whether filing for bankruptcy with a zero checking account balance (as often occurs) will eliminate the problem.

Payday Loans in Chapter 13 Bankruptcy

Chapter 13 filers must repay some or all debts through a Chapter 13 plan. The court will approve or "confirm" the plan if it pays creditors according to bankruptcy law.

Payday loans fall into the least important debt group, "nonpriority, unsecured debts." After higher-priority debts receive full payment, these obligations share whatever income remains, often receiving "pennies on the dollar." (This catchy phrase associated with Chapter 13 applies to this category only.)

After the plan is completed, the bankruptcy judge discharges any balance remaining on qualifying debts, including payday loans. Learn more about unsecured, secured, and priority debts in bankruptcy.

Important note. Not all balances in this category are discharged. A notable exception is student loans. Filers remain responsible for remaining student loan debt unless it is discharged in a separate bankruptcy lawsuit known as an "adversary proceeding."

When Bankruptcy Won't Erase Payday Loans

Bankruptcy provides people struggling financially with a fresh start. Because the fresh start comes at the expense of creditors, bankruptcy law has safeguards in place to ensure filers don't take advantage of the process by running up credit cards and taking cash advances shortly before filing for bankruptcy.

What Is Presumptive Fraud?

If you borrow $1,100 or more in consumer (not business-related) cash advances, such as payday loans, from a single lender within 70 days of filing for bankruptcy, you might not be able to discharge the debt. (Amount valid through March 31, 2025.) These transactions are presumed fraudulent.

What a Payday Lender Must Do

The bankruptcy court would discharge the debt as usual if the payday lender did nothing. However, if the creditor were to object to the debt discharge, the transaction would automatically be presumed fraudulent. You would remain responsible for paying it unless you could prove that you intended to pay for the payday loan when you borrowed it.

Ways to Overcome Presumptive Fraud

The simplest way to overcome the burden would be to demonstrate that you had no intention of filing for bankruptcy when you took out the payday loan. Showing that you were still paying bills when you borrowed the money would be persuasive. Explaining that you've encountered an unexpected financial problem, like an illness or job loss, could also help. Still, such a situation isn't required or conclusive.

For instance, sometimes people are so focused on getting by that filing for bankruptcy doesn't occur to them. Still, they quickly file once they realize it's an option (it can bring great relief). Someone who had taken out a payday loan within the window but was paying debts and hadn't consulted a bankruptcy lawyer would have a reasonable chance of overcoming the presumption.

Conversely, you'd likely have difficulty overcoming the presumption if you'd already stopped paying other debts because it would suggest you knew you didn't have the means to repay the cash advance. The same reasoning would apply if you had met with a bankruptcy lawyer before borrowing the funds.

Learn about other debts you can't discharge in bankruptcy.

Know Your Rights

Borrowers need to know their rights because lenders often exploit them. 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 isn't true. Like any other personal unsecured loans, payday loans can be fully dischargeable in a bankruptcy proceeding.