Payday Loan

Definition and Features of Payday Loans

Payday loans are short-term, high-interest loans designed to provide quick cash for urgent expenses until the borrower’s next paycheck. They typically involve small principal amounts (usually $100–$1,000), require no collateral, and offer fast approval with minimal credit checks. Lenders often require access to the borrower’s bank account or a post-dated check. The annual percentage rates (APRs) are extremely high, sometimes exceeding 300%–400%.

Risks Associated with Payday Loans

• Exorbitant interest rates and short repayment windows
• Risk of repeated borrowing, leading to a cycle of debt and escalating fees
• Potential for bank account overdrafts due to automatic withdrawals
• Legal action or wage garnishment if loans are not repaid
• Financial strain and increased instability, especially if multiple payday loans are used to cover previous debts

Dischargeability of Payday Loans in Bankruptcy

General Rule

Payday loans are generally considered unsecured debts and can be discharged in bankruptcy, both under Chapter 7 and Chapter 13. However, certain exceptions may apply, particularly if the lender alleges fraud.

Chapter 13 Bankruptcy

• Overview: Known as “reorganization” bankruptcy. The debtor proposes a 3- to 5-year repayment plan using their income to pay down debts. After completion, remaining eligible debts are discharged.
• Treatment of Payday Loans: Payday loans are treated as unsecured debts within the repayment plan. Lenders may receive only a portion of what they are owed, depending on the debtor’s disposable income. Any remaining balance after plan completion is discharged.
• Fraud Claims: As in Chapter 7, payday lenders can object to discharge based on fraud allegations.
• Automatic Stay: Collection efforts must stop immediately after filing.
• Benefit: Chapter 13 allows debtors to catch up on secured debts (like mortgages) while resolving payday loans and other unsecured debts without immediate asset liquidation.

Chapter 7 Bankruptcy

• Overview: Known as “liquidation” bankruptcy. Non-exempt assets may be sold to pay creditors, and most unsecured debts (including payday loans) are discharged.
• Dischargeability: Payday loans are usually dischargeable. Once discharged, the borrower is no longer legally obligated to repay.
• Fraud Exception: Lenders may object to discharge if they believe the debt was incurred through fraud (e.g., the borrower knew they could not repay, wrote a bad check intentionally, or took out the loan shortly before filing). Under 11 U.S.C. § 523(a)(2)(A), debts incurred by fraud are not dischargeable. Loans taken out within 70–90 days before filing are subject to heightened scrutiny regarding the borrower’s intent.
• Automatic Stay: Filing triggers an automatic stay, immediately stopping all collection efforts by payday lenders.

Signs Bankruptcy May Be Needed for Payday Loan Debt

• Struggling to make payments and juggling bills
• Relying on new payday loans to pay off old ones
• Using multiple payday loans, leading to a debt spiral1

The Bankruptcy Process for Payday Loans

• Preparation: Consult a bankruptcy attorney, complete a credit counseling course, and gather financial records (debts, income, assets, expenses)1.
• Timeline: Most Chapter 7 cases are resolved within 3–6 months.
• After Discharge: Once bankruptcy is complete, you are no longer legally required to pay discharged debts. Collection calls and wage garnishments must stop.

Rebuilding Credit After Bankruptcy

• Apply for secured credit cards
• Pay all new bills on time
• Monitor your credit report regularly
• Live within your means and avoid predatory lending in the future

Conclusion

Payday loans are generally dischargeable in both Chapter 7 and Chapter 13 bankruptcy, offering relief from overwhelming debt. Lenders may challenge dischargeability if fraud is suspected, especially for loans taken shortly before filing. Automatic stay protections provide immediate relief from collections. Bankruptcy can offer a clean financial slate and a path to rebuilding credit, but it’s important to consult a qualified attorney or credit counselor to determine the best course of action.

^*For those who qualify under federal law.