Thursday, June 28, 2012

Digging Deeper Into Debt With Payday Loans

Regularly advertised as an easy source of money, payday loans appeal to people with an urgent need. Bankruptcy and payday loans tend to go hand-in-hand because once you fall behind it can be virtually impossible to catch up.

The payday loan industry claims that these loans are meant to be a small, short term advance used to help a borrower meet their financial needs until their next pay day. The lender holds a check anywhere from a week to a month and in return, the borrower gets cash immediately. These loans unfortunately have extraordinarily high interest rates that more often than not leave a borrower worse off than before. At the time, borrowing this money seems like an appropriate option in an urgent situation, but what the borrower may not realize is that they are only digging themselves deeper into debt.

Lenders say that these loans are used only in emergency situations and over a short term period -- however this is absolutely wrong. A Wall Street analyst conducted a study and found that "the average customer makes 11 transactions a year, which shows that once people take [out a payday loan], they put themselves behind for quite some time(1)." Borrowing from paycheck to paycheck will only result in eventually defaulting on repayment.

In one situation a woman named Andrea Felts took out a loan to help cover expenses after her divorce. She took out a $400 loan and was charged $120 in interest for the 16 day loan period. When she wasn't able to pay the $520 she borrowed, she rolled over the loan for an additional $120 in fees. By the end she rolled her loan over a total of 5 times which resulted in $600 in fees on a $400 payday loan(2).

Once you are already struggling to make ends meet, taking out a payday loan can escalate an already dire situation very quickly and it's all too common for a borrower to eventually file for bankruptcy. For the most part, payday loans are considered unsecured debt and are treated as so during bankruptcy proceedings. Filing for Chapter 7 will allow a debtor to discharge their debt without repayment and essentially all unsecured debt is dischargeable. Under Chapter 13, the payday loan is treated equally along with all other unsecured debt in the debtor’s plan. .

If the loan was received within 60 to 90 days before filing, the loan may not be dischargeable in bankruptcy. The creditor will have the presumption they were taken out with no intention of being paid back. Also, if the electronic authorization or check written to the payday loan company “bounces” or is returned by the bank as insufficient funds, the payday loan company may refer the incident to the County prosecutor for bad check charges. If you are charged with writing a bad check, this is a criminal charge that is not dischargeable in bankruptcy.

If you find yourself submerged with debt and your payday loans are only aggravating the situation, contact one of our knowledgeable bankruptcy attorneys for more detailed information.


(1) M. Anderson, "Cash poor, choice rich, Paycheck-advance firms move in," Sacramento Business Journal (Jan. 11, 1999).
(2) "Payday Lenders: small loans, hefty fees, big problem." Consumer Reports Magazine. 02 2009: n. page. Web. 28 Jun. 2012. <>.

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