Bankruptcy Law Blog

Saturday, May 27, 2017

Loans From Payday Lenders Add Up Fast

When you have an emergency and need cash right away, there are only so many places you can turn. Your family and friends might be able to lend you money. You might have room on your credit card for a few more charges. Or you might get a payday loan.

Payday loans, also known as cash advances or check advances, are short-term loans that are theoretically supposed to be paid back out of your next pay check. If you can pay them back with your next check, they work pretty well. But if you can’t pay off the loan right away, you might soon find yourself with a growing mountain of debt since the loans are generally offered at really high interest rates. Because the interest rates are so high, you might end up owing three or four times more than you originally borrowed.

A church in Birmingham just paid off $41,000 in payday loans that 48 people in its neighborhood had taken out. A newspaper article on the church’s good deed highlights the stories of two of the former debtors. The first person profiled is an older gentleman who fell on hard times when he and his wife had medical expenses that he took out a payday loan to cover. The second person profiled, a younger, single, woman, got into trouble because she enjoyed shopping a little bit too much. Both of the people profiled, and all of the other people who benefited from the church’s generosity had to go through a financial planning class so they can make better choices in the future.

Unfortunately, very few people can expect to have their debts paid off by a church or other Good Samaritan. But that does not mean that it is impossible to get rid of payday loan debt. Bankruptcy is another way to wipe your debts away and get a fresh financial start.

Some payday lending contracts say that the debt cannot be discharged in bankruptcy. That is not true. Almost all payday loans are treated like any other unsecured debt (like credit card debt) and forgiven if you file for Chapter 7 bankruptcy. If you file for Chapter 13 bankruptcy, the debts are put into a repayment plan, just like all other debt.

The only reason a payday loan might not be forgiven is if you took out the loan shortly before filing for bankruptcy. In order to prevent people from racking up lots of debt with no intention of ever repaying it, the government limits what recent debts can be discharged in bankruptcy. Most debt needs to be 2-3 months old in order to be included in a bankruptcy. 

If you are struggling to pay back payday loans that have gotten out of control, it is time to talk to an experienced bankruptcy attorney. A good attorney will be able to give you some advice about what your options are. 

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