I frequently get asked, “can I file bankruptcy on payday loans?” The answer is “yes,” but I am always curious why people ask this question. “Oh, the payday loan company said that we couldn’t file bankruptcy on payday loans.” Well, I guess if I was an unethical payday lender, I would say the same. Because paying on payday loans makes no sense. And if you could get out of a payday loan by filing bankruptcy, why would you keep paying on it? Here are a few reasons why paying on a payday loan makes no sense:
- Why do you take out a payday loan in the first place? Because you have an emergency need for cash and don’t have anywhere else to turn. In my experience, those who have an emergency need for the $300 or so they can get from a payday lender almost always would qualify to file bankruptcy and the payday loan is not going to solve the problem. The only exception to this would be someone who has an urgent need for $300 now and would be coming into a very large sum of money in a week that would resolve their other financial troubles. This almost never happens.
- The interest rate on a payday loan is often upwards of 400% per annum. This makes no sense financially for the borrower and must be considered analogous to a predatory loan. Practically, if you took out a $300 loan now and had to pay it back in a year, you would have to repay $1,500 in a year. But these loans are two weeks loans where you usually borrow $300 now and pay back $350 or so in two weeks.
- But the problem is that often paying back the $350 payday loan leaves you short for the next two weeks, so you have to take another $300 payday loan. And the vicious cycle continues with you paying $50 every two weeks for the privilege of having taken out $300 at the very beginning.
While payday loans are dischargeable in bankruptcy, they create certain issues that can be more complicated than other types of debts. It is important that you talk to an attorney knowledgeable about bankruptcy, who can help you navigate the issues raised by payday loans in bankruptcy.
