Payday Lending: Usury at its Worst
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Payday lending represents the worst of the worst when it comes to consumer lending. The practice nearly always involves a request for post-dated checks, shockingly high interest rates, and shadowy, difficult-to-locate lenders whose corporate owners often turn out to be located on American Indian reservations or in foreign countries like Belize, outside of the reach of the Fair Debt Collection Practices Act (FDCPA) and other consumer protection laws. Once you take out a payday loan, you are typically required to repay it plus interest within 2 weeks, and failure to do so results in the cashing of post-dated checks you've provided to the lender, overdrawn bank accounts, fees, more interest, and a bad situation made much, much worse. It is a common misperception that payday loans are not dischargeable in bankruptcy. This is false, as explained below, but they can present some practical complications.
Payday Loans in Bankruptcy: Totally Dischargeable
The US Bankruptcy Code breaks down different types of debt into several classifications and treats each classification differently. For example, a debt with collateral securing it, such as a home mortgage, is classified as a "secured debt" and is given priority of payment over other classifications of debt if assets are liquidated in a Chapter 7 bankruptcy or in a Chapter 13 bankruptcy payment plan. Unsecured debt (debt with no collateral securing it) is divided into priority and non-priority classifications. "Priority" unsecured debt is debt without collateral securing it that the Bankruptcy Code has determined must be repaid in priority order, ahead of "non-priority" unsecured debt. Examples of this type of debt are child support payment deficiencies, recent tax debt, recent wages owed to former employees, and so forth. "Non-priority" unsecured debt is everything else: credit card debt, medical debt, personal loans, deficiency debts lingering after auto repossession or a home foreclosure—and payday loans. Payday loans are, like all non-priority unsecured debt, totally dischargeable in bankruptcy.
Payday Loans in Bankruptcy: Some Pitfalls
Payday loans do present some potential hazards in a bankruptcy filing, however. These hazards arise from the peculiar qualities of payday loans described above: the provision of post-dated checks, location of the creditors involved, and the quick turnaround time required contractually for repayment of the loans. Location of Payday Lenders presents the first challenge in a bankruptcy.
Upon filing of a bankruptcy petition, all creditors are noticed of the bankruptcy filing by the Bankruptcy Court. In order to ensure that this actually happens and that the creditor is noticed of the filing, you must include the name and address among other information in your bankruptcy petition. If you do not include the correct address, the creditor will not be properly noticed and will have a defense to actions your bankruptcy lawyer may take if they continue to harass you for collections after the filing.
However, with payday lenders, the key question is always who the actual corporate owner of the lending service is and where they are located. If they are located on an Indian Reservation or outside the territorial United States, it will be A) difficult to notice them until a viable address is ascertained; and B) even more difficult to execute a judgment for violations of the Bankruptcy Code with regard to post-filing collections attempts, etc.
The post-dated checks many such lenders require to make you a loan also present an issue in bankruptcy. Garnishments, lien perfections, foreclosures, repossessions, lawsuits, and other collections mechanisms are forbidden by the "automatic stay against collections" injunction that is raised against your creditors the moment you file a bankruptcy petition.
If a "regular" creditor garnishes your bank account, for example, after you file, that creditor can be made by the bankruptcy court to pay you severe sanctions. With a payday lender, the cashing of your post-dated checks also constitutes a violation of the automatic stay against collections. But, as noted above, finding them to execute the judgment for sanctions received is often trickier than it ought to be due to confusing chains of corporate ownership and actual corporate location.
Finally, a further potential complication is raised by the fact that payday lenders generally require payment of their loans within 2 weeks, with compounding fees and interest-rates for failures to timely repay. You are entitled to a discharge of your debts under the Bankruptcy Code and the US Constitution.
However, a discharge can be denied in rare circumstances for issues involving fraud or "bad faith," as it is termed by the Code. Individual debts which are otherwise dischargeable can be determined to be non-dischargeable if some bad faith or fraud was involved in the incurring of the debt. Debts incurred within the 90 days prior to the filing of a bankruptcy petition carry a presumption of bad faith, which must be overcome if the creditor files an "adversary proceeding" (lawsuit) within your bankruptcy case seeking to have the debt declared to be non-dischargeable.
However, a dischargeable debt is discharged unless a creditor files such a lawsuit. Payday lenders, located god knows where and preferring to victimize consumers outside of the scrutiny of judicial authorities, are not likely to show up in your local bankruptcy court to file such a lawsuit. But, if you find yourself with a snowballing payday loan debt and needing to seek protection in a Chapter 7 or Chapter 13 bankruptcy, and need to do so within 90 days of the date you incurred the debt, it could happen.
The post-dated checks present the further issue of when the individual debt incurred actually occurred: the date of the original loan, the date of the default, the date the bank charged you overdraft fees, and so on.
Payday Loans in Bankruptcy: The Bottom Line
The bottom line with regard to payday loans in bankruptcy is that you should avoid taking them in the first place. If you are in such immediate need of funds as to consider a payday lender, you might be better off consulting a bankruptcy attorney to deal with your other debt rather than attempting to service it via payday lending. You may save yourself money, hassle, and make a simpler bankruptcy process for yourself as well. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced