Are PayDay Loans Dischargeable in Bankruptcy?

Between household expenses, payments on secured debts such as your home and car, and everything else you have to do just to get by, you do not make enough to live comfortably. You are in over your head and payday loans seem like a quick fix. I’m not going to knock payday loans (at least not in this post) as they serve their purpose – when times are tight, a payday loan can help a debtor facing such dire situations as putting food on the table, paying rent, or getting to work. As long as the loan, and usually the enormous fee that accompanies it, are paid in full within thirty days of the origination date, then consider the fee the cost of not starving to death, being evicted or being fired. Payday loans become troublesome when one accumulates numerous loans in a short period of time and cannot pay down the principle.

Recently, a client owed $90 per month on a $300 loan. Unfortunately, the client had numerous loans and was only able to pay the loan “fee” for each loan every month. Per the terms of the agreement she signed with the creditor, the loan renewed itself each month. Like many people who have to take out these loans just to survive, especially during these dire economic times, this client became caught in the vicious cycle of only paying the fees each month and never paying down the principle. Eventually, payday loans, when combined with other unsecured debts, may become extremely overwhelming making bankruptcy an most appealing option.

Fortunately, payday loans are treated like any other unsecured debt when filing bankruptcy. So long as at least one payment has been made toward the outstanding balance, the loans are dischargeable in bankruptcy. On the other hand, if no payment has been made toward the debt, and if the loans were acquired within 90 days of the filing, there is the very real possibility that both the creditor and the Trustee will scream, “fraud” as such behavior can be used to establish intent to defraud creditors. As mentioned in a previous post, when such a motive is proven, the result can be catastrophic – jail and/or fine.

If you are drowning in payday loan debt, and also have a significant amount of other unsecured debt, you should contact a competent lawyer to discuss your options.