By Ryan C. Wood
Can I file bankruptcy if I have a payday loan or advance? Yes you can. Payday loans are unsecured debts just like a credit card or medical debt. Payday advances are dischargeable. There are some issues though given the nature of the debt. Payday loans are usually to be repaid within a relatively short period of time. Given that payday loans are usually recently incurred when filing for bankruptcy protection there are a few issues for bankruptcy lawyers to discuss before filing for bankruptcy protection. The reality is few payday loan companies pursue nondischargeability claims At the same time, past results are not necessarily indicative of future results.
1. Payday Loans Are Horrible
Before discussing the pitfalls of filing for bankruptcy when you owe payday loans let us examine payday loans in general and how the work. Payday loans are supposed to be short term loans until the borrower gets paid next. The percentage rates are usually disgustingly high and should be illegal. We have documentation of a percentage rate of 1000%. To obtain a payday loan or advance it usually requires some sort of regular income of some significance. If make $200 a week you will most likely not qualify for an amount larger than that. Once you are approved for an amount to borrow, you will be asked to write a post-dated check for the amount borrowed to be cashed when you get paid. The original loan will have some sort of fee ranging from $40 to $100 for the loan. If you are unable to pay the loan back when you get paid some companies will allow the loan to be renewed for another high fee ranging from $40 – $100. What about that post-dated check you wrote? If the check bounces your bank will charge you fees too. Not paying the payday advance or loan on time will start a vicious cycle of increased fees. Borrowers commonly have to continue to obtain a new payday advance or loan to keep their bills paid while continuing to incur more and more fees.
2. Recently Incurred Debts May Not Be Discharged
Debts incurred or obtained close in time to filing for bankruptcy raises a number of issues. The problem is that the payday loan company may have an argument that you never intended to pay back the loan given you filed for bankruptcy so close in time to obtaining the loan. Bankruptcy Code Section 11 U.S.C. 523(a)(2)(C) provide for a 90 day look back for cash advances and payday loans. The payday loan company would have to file an adversary lawsuit against the bankruptcy filer alleging the payday loan should not be discharged given it was incurred within 90 days of filing the bankruptcy case. Bankruptcy Code Section 11 U.S.C. Section 523(a)(2)(A) governs debts incurred from fraud. If the case is filed within the 90 days of incurring the loan the payday loan could argue with circumstantial evidence you never intended to pay back the payday loan.
3. Payday Loans With Post-Dated Checks Are A Problem
Another problem is the post-dated check that was provided to the payday advance company. Section 326 of the Bankruptcy Code governs the automatic stay that becomes effective as soon as your bankruptcy attorney files your bankruptcy case. The automatic stay stops any and all collection activity. The problem is that Section 362 does not stop the presentment of a negotiable instrument, or a post-dated check. You need to research your circuit cases regarding this issue to determine if trying to deposit the post-dated check is a violation of the automatic stay or not.
While it is rare for a payday loan company to sue a bankruptcy filer for an unpaid payday advance or loan it is important to be fully advised of the potential ramifications or filing for bankruptcy protection with a recent payday loan or advance. It is more of a cost benefit analysis. If the payday loan is only $500 it does not make much sense to spend thousands of dollars to prove the loan should not be discharged. It does happen though.