Bankruptcy and Payday Loans: Can You Write Them Off?

This time Chris in Dallas asks, “Can a payday loan be discharged in bankruptcy?”

Great question! Payday loans are an easy way for people with bad credit to get a loan. The borrower is able to write a personal check for the amount they wish to borrow plus the finance charge, and receive cash for that amount. Borrowers may sign over electronic access to their bank accounts to receive and repay payday loans. Lenders hold the borrower’s check until the next day when the loans and finance charges must be paid in one lump sum by the borrower. Borrowers can pay back the loan by redeeming the check and paying the loan with cash, allowing the check to be deposited at the bank, or only paying the finance charge allowing the borrower to roll the loan over for another pay period.

Unfortunately, payday loans are very expensive.  The check can bounce if the loan is not paid back the next business day in full. Consumers are also very likely to become trapped into continually borrowing money because they may not be able to afford the repayment terms, and this is generally the case with not only trustworthy loan companies, but also with companies offering reputable payday loans. Consumers who find themselves in need of payday loan debt assistance CAN discharge the payday loan in bankruptcy.

The two types of consumer bankruptcy are Chapter 7 and Chapter 13.  If a borrower has any assets that are not exempt, a bankruptcy trustee will sell those non-exempt assets to repay the borrower’s creditors in a Chapter 7 bankruptcy. Once those assets are sold, the bankruptcy court will discharge the borrower’s remaining unsecured debts. Qualification for Chapter 7 depends on income, assets, and state laws. In Chapter 13 bankruptcy, borrowers are able to make a proposal to repay their creditors over time (usu. five years). The borrower’s monthly disposable income will determine the borrower’s monthly payment. After the borrower has made payments for five years, any remaining unsecured debts will be discharged.

Even though it may not work out, a person can always try to get a payday loan settlement before attempting to get the debt discharged in bankruptcy.