Can Payday Loans Be Included in Bankruptcy?

Last updated by Zaving Editorial Team, on May 20th, 2024

Uncover the implications of including payday loans in bankruptcy and explore solutions with zaving's expertise.

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What are payday loans and how do they work?

Payday loans are short-term loans intended to provide quick cash until the borrower's next payday. These loans usually involve borrowing a small amount, often less than $1,000, with the agreement to repay the full amount, plus fees and interest, on the borrower's next payday.

Qualifying for a payday loan is often simpler than getting approved for traditional loans, as lenders typically require minimal documentation and don't heavily weigh credit history. Borrowers typically need to provide personal information such as name, address, employment details, and bank account information.

Upon approval, the borrower receives the loan amount—usually in cash, through a check, or deposited directly into their bank account. Repayment terms typically require settling the full loan amount, including fees and interest, within a short period, usually by the next payday.

However, these loans often come with steep fees and high-interest rates. Failing to repay the loan on time can result in additional charges and may lead to a cycle of debt. Due to these risks, it's crucial to carefully consider the terms and conditions before opting for a payday loan.

Can payday loans be included in bankruptcy?

Whether payday loans can be included in bankruptcy depends on the specific chapter of bankruptcy you file under and the timing of your application. Here's a breakdown:

Chapter 7 bankruptcy:
Payday loans can be included in Chapter 7 bankruptcy. During Chapter 7, an automatic stay is issued, preventing creditors from collecting debts. This includes payday lenders. If the payday loan was obtained before filing for bankruptcy, the debt will be discharged along with other unsecured debts upon successful completion of the Chapter 7 process.

Chapter 13 bankruptcy:
The inclusion of payday loans in Chapter 13 bankruptcy is more complex. While the automatic stay prevents creditors from collecting existing debts, it doesn't automatically discharge them. You need to submit your payday loan debt to the court as part of your Chapter 13 repayment plan. The court will review the loan and determine how much, if any, of the debt you need to repay based on your income and expenses.

A key exception to consider is the ‘presumptively fraudulent' rule. This rule applies if you obtained a payday loan exceeding $1,100 from a single creditor within 70 days of filing for bankruptcy. In such cases, the lender can presume you intended to defraud them and challenge the dischargeability of the loan debt. This means you might still be liable for the debt even after your Chapter 7 or 13 bankruptcy is discharged.

Can I get a payday loan if I'm bankrupt?

In most cases, being bankrupt can significantly limit your ability to access payday loans. Bankruptcy often affects your creditworthiness and financial standing, making traditional lending institutions hesitant to offer loans, including payday loans.

However, there might be certain exceptions during a bankruptcy process. For instance, during Chapter 13 bankruptcy, it's possible to seek court permission to acquire a loan for specific essential expenses. The court evaluates the loan's purpose, amount, and repayment feasibility before approving such requests.

Yet, seeking payday loans while undergoing bankruptcy isn't a common or recommended practice due to the potential financial risks and complexities involved. Additionally, it's essential to adhere to the rules and regulations stipulated by the bankruptcy court and seek advice from a bankruptcy attorney before considering any financial transactions or loan applications.

More of your frequently asked questions about payday loans

Can I get a payday loan if I'm unemployed?

Acquiring a payday loan without employment can be tough due to lenders' requirements for consistent income verification, typically derived from a job. While some lenders might consider alternate income sources, meeting their criteria might prove challenging. Evaluating the high fees associated with payday loans and exploring alternative financial solutions becomes crucial before considering such loans while unemployed.

What if I can't repay my payday loan?

If repayment of a payday loan becomes challenging, immediate action is essential. Reach out to your lender without delay to discuss available options, such as devising a repayment plan or exploring alternative arrangements. Neglecting this issue may lead to accrued fees, persistent collection efforts, or legal repercussions. Exploring alternatives like extended payment agreements, negotiating realistic terms with the lender, or seeking assistance from financial advisors can mitigate potential financial fallout.

What are the alternatives to payday loans?

Seeking alternatives to payday loans involves exploring personal installment loans, credit union options, borrowing from friends or employers, and utilizing support from nonprofit credit counseling services or local financial aid programs. These alternatives offer more reasonable terms compared to the short-term, high-cost nature of payday loans.

Do payday loans impact credit scores?

Generally, payday loans have minimal direct impact on traditional credit scores if managed responsibly and paid back on time. However, any missed payments or defaults could prompt lenders to report the delinquency to credit bureaus, resulting in adverse effects on credit scores. Moreover, some payday lenders might not report loan activity to credit bureaus at all, meaning that even timely repayment might not positively impact credit scores. The impact of payday loans on credit scores can fluctuate based on credit scoring models and individual lenders' reporting practices.