Payday Loans in Bankruptcy

In most cases, you can wipe out or "discharge" a payday loan in Chapter 7 bankruptcy or pay a small portion in Chapter 13 bankruptcy. Even so, you'll want to consider a few issues before filing for bankruptcy if you owe money for a cash advance, payday loan, or similar debt, especially if you took it out shortly before filing. A payday loan lender could challenge your debt discharge and, if successful, leave you responsible for repaying the payday loan.

How a Creditor Challenges Payday Loans in Bankruptcy

Most people intend to pay for things they buy on credit, which is good because knowingly taking out a loan or using credit when you don't intend to repay it is considered fraudulent, and you don't get to discharge fraudulent debts in bankruptcy.

Additionally, bankruptcy law has rules that help a creditor ferret out fraud. A creditor who suspects fraud can object to your discharge by filing a lawsuit called an adversary proceeding. If the lender wins, at a minimum, you'd remain responsible for paying the loan.

A payday loan lender has two ways to fight your bankruptcy discharge. The easiest to prove and most frequently used is a "presumptive fraud theory." The other is a fraudulent intent theory.

What Is a Presumptively Fraudulent Payday Loan?

The payday lender can use the presumptive fraud rule if you take out a payday loan or other cash advance within 70 days of filing bankruptcy totaling $1,100 or more from a single creditor. (The presumptive fraud amount is valid between April 1, 2022, and March 31, 2025.)

Transactions within this period that meet or exceed the current presumptive fraud amounts are presumed fraudulent. The payday lender doesn't need to prove you intended to commit fraud. It's assumed automatically.

What Are the Consequences of Losing a Payday Lender's Presumptive Fraud Discharge Objection?

Most lenders will argue the presumptive fraud theory, and you'll remain responsible for repaying the loan if you lose the case. If you find yourself facing a presumptive fraud charge, consider settling the debt for less than the amount owed. Most lenders will be receptive because they can avoid the costs associated with litigation and the uncertainty of the outcome.

Can the Payday Lender Win a Discharge Objection Under a Fraudulent Intent Theory?

It's possible but more difficult. A fraudulent intent theory, as opposed to presumptive fraud, doesn't rely on the 70-day rule. The lender must prove you acted with fraudulent intent, which isn't easy, and sometimes payday lenders are unsuccessful in bankruptcy court. Here's why.

Many times, payday loans are not one-time loans or advances. Instead, a borrower falls into a long-term pattern of taking payday advances to pay the exorbitant finance charges and balances on prior payday advances. Because of this cycle, borrowers rely on high-interest payday loans as a source of income.

In this situation, courts often find no fraudulent intent, and the payday loan is a single debt that dates back further than the most recent payday advance. The further back in time the lender must go, the more difficult it is to prove you knew you couldn't repay the debt.

You can learn about your court's practices by speaking with a local bankruptcy attorney.

What Are the Consequences of Losing a Payday Lender's Bankruptcy Discharge Objection Based on Fraudulent Intent?

It's important to avoid fraud allegations in bankruptcy court because the consequences of a fraud finding can include more than not receiving a discharge for the debt or the court dismissing your case. In some situations, you could face criminal fines and imprisonment. Simply put, it's not worth the risk.

When a Payday Loan Lender Might Violate the Law

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:

• Automatic stay violation. A creditor who tries to cash the post-dated check after you file for bankruptcy or deposit it knowing you are in bankruptcy would violate the automatic stay order. The automatic stay order stops collection activity during bankruptcy. If this happens, the court could require the lender to return the funds to the bankruptcy trustee appointed to administer your case.
• Bad check-writing allegation. Also, the payday lender might accuse you of writing a bad check and threaten to press criminal charges. A payday lender that does this to you might violate state and federal fair debt collection rules, consumer laws, and automatic stay rules.

Some states prohibit or restrict payday lenders from engaging in the practice of demanding post-dated checks. Learn more about illegal debt collection practices.

How to Avoid Problems With a Payday Loan in Bankruptcy

Rather than deal with the time, money, and risk of fighting a discharge objection by a payday lender, you can avoid this problem by not taking loans shortly before filing for bankruptcy or filing Chapter 13 bankruptcy and paying the debt through your repayment plan.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

Updated October 9, 2023