In most cases, you can wipe out (discharge) a payday loan in Chapter 7 bankruptcy or pay some part of it in Chapter 13 bankruptcy (often a small portion). Even so, special issues exist that you’ll want to consider before filing bankruptcy if you owe money for a cash advance, payday loan, or similar debt—especially if you took it out shortly before filing for bankruptcy.
Find out the ways that a payday loan lender could challenge the discharge of its debt and problems that might violate the law.
(Learn more in Your Debt in Chapter 7 and Unsecured Debt in Chapter 13: How Much Must You Pay?)
Most people intend to pay for the things that they buy on credit—which is a good thing. Why? Knowingly taking out a loan or using credit when you don’t intend to repay the debt is considered a fraudulent act.
You don’t get to discharge fraudulent debts in bankruptcy, and bankruptcy law has rules that help a creditor ferret out fraud. A creditor who suspects fraud can object to your discharge (challenge your ability to wipe out the debt) by filing a type of lawsuit called an adversary proceeding.
The presumptive fraud rule can cause particular difficulty if you’ve taken out a payday loan or other cash advance within 70 to 90 days of filing bankruptcy. Transactions that run afoul of this timing rule are presumed fraudulent. The burden would be on you to prove that you didn’t have fraudulent intent.
It’s questionable. Payday lenders that challenge the discharge of payday loan debt are often unsuccessful in bankruptcy court. Many bankruptcy courts don’t look favorably upon payday lending practices and require the payday lender to prove that you acted with fraudulent intent.
You can learn about your court’s practices by speaking with a local bankruptcy attorney.
Of course, you could lose your discharge if a payday lender can prove a fraud case. Rather than deal with the time, money, and risk of fighting a discharge objection by a payday lender, you might be able to avoid this problem by:
It’s common for payday lenders to require an active checking account. Some might require you to write a post-dated check or allow automatic withdrawals. Here are some problems that come with post-dated checks that you’ll want to be aware of:
Some states prohibit or restrict payday lenders from engaging in the practice of demanding post-dated checks. You can learn more in Illegal Debt Collection Practices.