Everyone experiences a financial crisis. Your car breaks down, you are out of work because you or your child is sick, or you have an unexpected home repair. You have bills to pay and you need to buy groceries. It is still another week or longer until your next paycheck, so what do you do? Many people turn to PayDay loans for help. Unfortunately, PayDay loans can trap you in a vicious cycle of debt that may or may not be dischargeable (forgivable) in a Chapter 7 bankruptcy case.
1. Do you qualify for bankruptcy?
While payday loans may or may not be dischargeable, one of the important first steps is to estimate whether you qualify for bankruptcy, the estimated cost of the bankruptcy, and compare your options and pros and cons. You can do so below using this free bankruptcy calculator.
2. Can I Include Payday Loans in My Chapter 7 Bankruptcy Case?
If you owe a PayDay loan, you must include the debt in your Chapter 7 bankruptcy schedules. All debts must be included in a bankruptcy case, regardless of whether the debt may be discharged or not. PayDay loans are unsecured loans. Most unsecured debts are eligible for a discharge in Chapter 7 bankruptcy. However, your PayDay loans may not be dischargeable in some cases.
Debts Incurred Shortly Before Filing Bankruptcy
Debts incurred between 60 and 90 days before filing for bankruptcy relief might not be eligible for a discharge. Loans taken out in anticipation of filing bankruptcy cannot be discharged. The court assumes that these debts are fraudulent because you incurred the debt anticipating filing bankruptcy instead of repaying the debt.
The problem with many PayDay loans is that they automatically renew every 30 to 60 days. Therefore, lenders argue that the debts are non-dischargeable because they were incurred within 60 to 90 days of filing the Chapter 7 petition.
Agreements Prohibiting You From Including PayDay Loans in Bankruptcy
In some cases, lenders include clauses in the paperwork stating the PayDay loan is not dischargeable in bankruptcy. This clause is not legal and does not impact a discharge. If the debt is eligible for a discharge under federal bankruptcy laws, the clause in the PayDay loan agreement does not prevent the court from discharging the PayDay loan.
Legal Treats for Bad Checks
The lender might also claim that you can go to jail if you try to close the bank account to prevent it from depositing a post-dated check or prevent it from withdrawing funds from your account under an ACH authorization. In most cases, this threat is not valid.
The lender knew that you did not have the money to pay the post-dated check or electronic withdrawal when you issued the check or signed the agreement. Therefore, it is difficult to prove that you committed fraud when the lender willingly accepted a “bad check.”
Will I Get Into Trouble With My Chapter 7 if I Just Took Out a PayDay Loan?
You will not get into “trouble” in your Chapter 7 for filing bankruptcy immediately after taking out a PayDay loan. However, as we discussed above, a recent loan may not be discharged in bankruptcy. If the lender objects to the discharge, you may still owe the PayDay loan even though you filed for bankruptcy relief.
State Laws Vary Regarding PayDay Loans
Many states have enacted laws governing PayDay loans because these loans are so abusive to consumers. In some states, PayDay loan companies might be prohibited from automatically renewing a PayDay loan. That could help you because you could merely wait for a few months and then file Chapter 7 to get rid of the debt.
3. How Do Payday Loans Work?
According to the Consumer Financial Protection Bureau (CFPB), there is no standard definition for a PayDay loan. However, there are some common characteristics of PayDay loans. PayDay loans are also referred to as cash advances, paycheck advances, or payday advances. PayDay loans are short-term loans for small amounts. In most cases, the due date for the loan is within two to four weeks. PayDay loans are generally paid in a lump sum.
Most companies require borrowers to submit a post-dated check for the full payoff amount, including interest and fees. Other lenders may require borrowers to sign an ACH authorization to allow the lender to electronically withdraw the loan payoff from your bank account on a specific date.
Some PayDay loans may be “rolled over” or renewed. Borrowers may be required to pay the interest and fees due, but the loan’s principal amount is extended for another period. The fees and interest for PayDay loans can be extremely high. Some lenders may charge fees that can equal an APR (annual percentage rate) of 400 or more percent.
Unfortunately, PayDay loans often make money problems worse. Some individuals become trapped in a cycle of paying interest and fees to continue to roll over loans because they cannot afford to pay off the original loan balance. Other individuals borrow more money to pay off PayDay loans, which only adds to their debt problems.
4. Should I Talk to a Chapter 7 Bankruptcy Lawyer About PayDay Loans?
Yes, it is wise to talk to a Chapter 7 bankruptcy attorney in your area before filing bankruptcy on PayDay loans. Because PayDay loans and state laws vary, it is best to have an experienced bankruptcy attorney review your case before filing for bankruptcy relief.
Your lawyer gives you specific steps to take to help you get rid of PayDay loans through the bankruptcy process. In some cases, the attorney may advise you to close the bank account and wait three months to file a Chapter 7 case. If your loan does not renew, you might need to wait just a couple of months after the due date to file your Chapter 7 case.
There could be other options that you could take to get rid of PayDay loans in bankruptcy. However, because each situation is unique, it is impossible to say whether or not a PayDay loan is dischargeable in Chapter 7 until an attorney reviews your PayDay loan agreement and assesses your entire financial situation.
5. How Do I Find a Chapter 7 Bankruptcy Lawyer for PayDay Loans?
Ascend can help you find a bankruptcy lawyer in your area that offers free bankruptcy consultations. You can use our Bankruptcy Attorney Fee Estimator to estimate how much attorneys charge in your area and locate an attorney who offers a free consultation to discuss bankruptcy.
If you have questions about debt relief, Ascend has resources to help. You can find answers to many of your questions about bankruptcy and debt relief options in our free online library. If you are interested in a Chapter 13 bankruptcy case, use our free Chapter 13 bankruptcy calculator to estimate your bankruptcy plan payments.
If you are ready to take control of your debt, we are here to help. Contact us online or call (833) 272-3631 now to speak to a representative. We want to give you the resources and information you need to get out of debt using the best debt relief solution for your situation.