Navigating Payday Loans and Bankruptcy: Essential Tips
Payday loans and bankruptcy are two topics many people would prefer not to think about, let alone discuss. But when financial pressures mount, a payday loan can seem like a quick fix, especially if traditional credit options aren’t available. However, these loans often come with extremely high-interest rates that can trap borrowers in a vicious cycle of debt. This cycle often leads people to consider a more permanent solution, like filing bankruptcy, to regain control of their finances.
Navigating the intersection of payday loans and bankruptcy can feel like traversing a legal maze. In this post, we’ll unpack some common questions and misconceptions surrounding payday loans and bankruptcy, giving you the clarity and confidence to make informed decisions about your financial future.
Can Bankruptcy Eliminate Payday Loan Debt?
Generally, yes, payday loans, similar to credit card debts and medical bills, can be discharged in bankruptcy. Chapter 7 and Chapter 13 are the two most common types of bankruptcy for individuals. Let’s dive into each one.
Chapter 7 Bankruptcy
Often referred to as “liquidation bankruptcy”, Chapter 7 allows debtors to liquidate non-exempt assets to repay their creditors. Payday loans, typically considered unsecured debts because they’re not tied to any collateral, can be discharged through this process.
Filing for Chapter 7 bankruptcy in New York initiates an “automatic stay”. This legal provision halts debt collection activities by creditors, including actions to collect payday loan debt, offering much-needed breathing room from harassing phone calls and threats.
Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 allows individuals to retain their property while following a court-approved repayment plan lasting three to five years. Payday loans are categorized with other unsecured debts and are usually repaid at a lower rate than the original amount owed.
Even with options like Chapter 7 and Chapter 13, wiping out payday loan debt through bankruptcy can become complicated under certain circumstances. Understanding these scenarios is crucial to prevent potential setbacks.
When Payday Loans Become an Issue
While filing for bankruptcy can provide relief from payday loans, certain instances could raise red flags, making it harder to achieve a complete discharge of your debt. Let’s explore these scenarios further.
Taking Out Loans Right Before Filing
Taking out substantial payday loans just before filing for bankruptcy can be seen as an attempt to defraud creditors. Courts presume debtors make purchases and acquire loans with the intention to repay them.
When large debts appear immediately prior to seeking bankruptcy protection, it casts doubt on the debtor’s intent and could jeopardize the discharge of those debts. This could be seen as presumptive fraud. For instance, according to bankruptcy law, cash advances exceeding $1,000 obtained within 70 days of filing may be deemed non-dischargeable under what is known as the “black letter law”.
This rule focuses on situations where individuals borrow significant sums shortly before seeking debt relief, which could indicate they took on the debt without any intention of repaying it. This is why it is important to consult with a bankruptcy attorney before filing bankruptcy. Interestingly, two separate loans of $999, rather than one loan of $1000, wouldn’t fall under this rule.
Automatic Stay Violations
Once a bankruptcy case commences, the “automatic stay” kicks in, prohibiting creditors from collecting debts, including payday lenders. This means that creditors must cease all collection activity. If a payday lender attempts to cash a post-dated check or continues to withdraw money from your bank account after you’ve filed, they’re in violation of the automatic stay.
Payday lenders may use tactics that could be considered unfair, deceptive, or abusive. This action could lead to serious consequences for the lender, as they are in violation of bankruptcy court. For instance, they might make threats to have debtors imprisoned for failing to repay a loan, a practice deemed illegal by the Consumer Financial Protection Bureau. Recognizing these tactics and knowing your rights as a borrower can protect you from predatory lending practices.
Facing payday loan troubles? Experienced bankruptcy attorneys understand the complexities of this area of law. They can provide guidance, devise a strategic plan, and help you pursue a fresh financial start. If you are struggling financially, reach out to a bankruptcy attorney for a free consultation.
Conclusion
Dealing with payday loans and bankruptcy can feel daunting. Remember that each individual’s financial situation is unique, and understanding your legal options is crucial. Consulting with a reputable bankruptcy attorney is always advised to discuss your individual circumstances and seek guidance for navigating your path to debt relief.