Payday Loans Are Dischargeable In Bankruptcy
Gina is a single mother of three, trying to make ends meet.
She barely earns enough to cover her monthly expenses, and the expenses always seem to be due before her next paycheck.
So, Gina did what many Americans in this situation do: She got a payday loan.
And it pushed her over the financial cliff.
Former Daily Show correspondent John Oliver recently did a great exposé on the entire payday loan industry on his new show “Last Week Tonight”. See Oliver’s payday loan rant video here, as part of an article written by John Healey of the Los Angeles Times.
What is a PayDay Loan?
A payday loan is a short term loan which is due at the time of your next paycheck. For a fee, of course.
According to the United States Consumer Financial Protection Bureau, the typical fee is between $10-$30 for every $100 borrowed–which equates to an annual percentage rate of over 400%. Some go as high as 1,900%!
This is bad enough if you actually repay the loan on time. But it gets much worse if you don’t.
If you don’t repay on time, the loan rolls over into a new loan, and the interest gets tacked on to the principal and you owe an even higher amount by the next pay period.
For many, this keeps spiraling until the payday loan people decide to get aggressive. And they can be ugly.
For those on a fixed budget, like our poor Gina, this is an impossible scenario.
How Bankruptcy Can Eliminate the Payday Loans?
With certain exceptions, the Bankruptcy Code allows most unsecured debts to be discharged.
The main exceptions are recent tax debts, student loan debts, debts incurred through fraud, domestic support obligations, and a few others you can see by visiting the link at the beginning of this section.
As long as the payday loans were not incurred through fraud, payday loans are dischargeable in bankruptcy. (Honestly I’m not sure how you could get a payday loan fraudulently– I suppose by lying about having a job; but they all require proof of a paystub and other verification).
In any event, in nearly all cases, if you obtain a discharge in Chapter 7 bankruptcy case, you will eliminate your obligation to pay on the payday loans.
The same is true for Chapter 13 or Chapter 11.
Many payday lenders require the borrower to provide post-dated checks for them to use for interest payments if the principal isn’t repaid.
This is very dangerous because if the check bounces, you may lose your account privileges and be put on Chex Systems which can result in you being prevented from opening a checking account at another bank.
Bankruptcy is a Solution To Payday Loan Debts
Payday loans seem like a good deal, but they are not. It is clearly best to never take out a payday loan. But fortunately, bankruptcy does offer a solution for those unable to satisfy their payday loan obligation.
It worked for Gina (not her real name). She filed bankruptcy and is now debt-free.
Image by TaberAndrew