Last Updated on January 11, 2023 by James Gentile
How do payday loans and bankruptcy mix? If you are struggling with payday loans, you may be able to find some relief by filing bankruptcy. Payday loans are unsecured loans obtained through a variety of sources. Individuals often reach these loans for a fast and seemingly easy way to get funds, but interest rates are very high, and the repayment is quite difficult. Many are forced to take increasingly larger payday loans out to repay their existing loans. This cycle is financially debilitating, but bankruptcy may offer some an option.
What Are Payday Loans?
Payday loans, also called cash advances or check advances, are high-interest rate loans with very short terms, often only a few weeks. The borrower often seeks out these loans to meet their financial needs until their next paycheck. You often sign an agreement stating you will make repayment on time, or the credit issuer will charge you very high fees. Additionally, you may be forced to write a check that the lender will cash against your account if you fail to make payment.
Can You Discharge Payday Loans in Chapter 7 Bankruptcy?
Anyone stuck in the payday loan cycle knows just how tiresome and overwhelming it can be. Chapter 7 bankruptcy may be the first step. In this form of bankruptcy, an individual will liquidate. What does this mean? It means that you agree to allow the court to sell any possessions you own that are not otherwise protected under the law to repay your debtors. Any debt left after this is discharged, and you do not have to repay it.
Chapter 7 bankruptcy is ideal for those with a significant amount of unsecured debt. Payday loans are unsecured debt. This means that, as long as the payday loan is listed as unsecured debt on your bankruptcy filing, it will likely be discharged during the process.
Can Chapter 13 Help with Payday Loans?
Chapter 13 is another form of bankruptcy. In this form, the debt you owe is recognized to make it more affordable for you to repay. For three to five years, you’ll make payments to the court. The court will pay your creditors. At the end of that timeframe, the court will discharge most other debt. However, under this method, you do not lose any of your assets. Chapter 13 is ideal for those who do not qualify for Chapter 7, who have a significant amount of assets, or those who want to protect property under a loan.
Payday loans are likely to be wrapped into the repayment plan if you file Chapter 13, along with your other debt. Keep in mind that this option may be beneficial to individuals who have a personal loan secured by a vehicle or other asset. In some states, payday loans have transformed to become more asset-based. However, Chapter 13 can help you to protect the asset even as you file for bankruptcy.
A Few Things to Keep in Mind
Bankruptcy law does not protect individuals who have acquired the loan in the last 60 to 90 days. If you have a new payday loan – even one reestablished recently, this may impact you. The renewal of a payday loan to “buy more time” can limit the reach of bankruptcy protection. It’s important to take action to protect yourself from payday loan lenders. Avoid taking out new loans and, whenever possible, work with a bankruptcy attorney.
