January 30, 2020
Can Bankruptcy Eliminate Payday Loans?
One of the debts frequently sought to be included in bankruptcy filings are payday loans. You may have heard conflicting information about whether these types of loans can be included. The fact is that there is nothing to stop you from including a payday loan in your list of creditors. Here are some basics that you should know about payday loan and why they can be included in a Chapter 7 or Chapter 13 bankruptcy action.
What is a Payday Loan?
Payday loans are short-term financing options that typically come with a higher rate of interest and a shorter duration. Most loans of this type are designed to provide funding for emergencies like car repairs, deductibles on medical services or providing financing between paydays.
The payment process usually involves providing the lender with a check that is scheduled for deposit on the due date, or providing your bank account information so that an electronic withdrawal can be initiated on the loan’s settlement date.
These loans usually include terms and conditions that include repayment within 14 days or less. While some lenders have provisions for extending the loans, that process often involves applying additional fees and charges that make it more difficult to settle the entire balance. It doesn’t take long to create a debt that never seems to go away.
Is the Loan Secured or Unsecured?
Payday loans are generally structured as unsecured debt. This means there is no collateral needed to secure the loan. That’s part of the rationale for the higher interest rates, since the lender is taking on a greater risk in order to provide the short-term loan.
Discharging a Payday Loan in a Chapter 7
As an unsecured debt, it’s possible to include a payday loan in a Chapter 7 filing. Like credit cards and other forms of secured debt, the lender is prevented from attempting to collect the debt due to the automatic stay imposed by the court.
In practical terms, that means the check you gave the lender to run through your bank account on the agreed upon date cannot be processed. If you set up plans for an electronic withdrawal on a date that’s after the bankruptcy filing date, the lender cannot initiate it. Once the lender has received notice from the court, all attempts to collect on the debt must stop.
Assuming that your Chapter 7 is approved by the court, you will hand over any non-exempt assets that the trustee had requested. Those will be sold and the funds used to partially settle your debts. The payday loan may or may not be included in that distribution, depending on how much is collected by the trustee. In any event, all remaining debt (including the loan balance) will be discharged and you are no longer under any obligation.
Paying Off the Loan Balance in a Chapter 13
It’s also possible to include a payday loan balance in a Chapter 13 filing. If your repayment plan is structured to eventually settle all of the debts, the lender will receive the balance that was due at the time you filed the bankruptcy. When the repayment schedule is structured to settle priority debts first and then partially pay non-priority debts, the lender may receive only a percentage of the original amount due, or nothing at all.