Discharging Payday Loans in Bankruptcy

September 17, 2010

In these tough economic times, many Americans are desperate to make ends meet.  Some are becoming trapped in a destructive cycle of payday loans.  A payday loan is a short term, high interest loan that is secured by a post-dated check.  The company loans the borrower a few hundred dollars that is repaid on the borrower’s next payday.  What is meant to be a small, convenient, and short term loan to pay an immediate expense (an overdue electric bill, for instance), often results in multiple loans and an endless cycle of debt.  Unfortunately, many payday loan borrowers are unable to free themselves from this cycle and are forced to seek bankruptcy protection.

Individuals often worry that the payday loan company may file a criminal “bad check” charge if the payday loan is included in the bankruptcy.  The payday loan company wants you to believe this, and many have their customers sign a certification that the borrower is not contemplating bankruptcy. 

While there are a few exceptions, generally being unable to pay a post-dated check is not a crime.  When you wrote the check both you and the payday loan company knew there were not sufficient funds in your bank account to pay the check.  Because there was no present intent to pay, the post-dated check is not a “bad check,” only a future promise to repay the loan.

Even after your bankruptcy is filed, a post-dated check may be presented for payment.  In some cases (notably in the 6th and 8th Circuit Court of Appeals) courts have stated that the presentment of the post-dated check does not violate the automatic stay provisions of the bankruptcy code.  However, some courts have said that the funds collected by the payday loan company is an “avoidable transfer” meaning the bankruptcy court could order the company to return the money.

If you have payday loans, consult with an experienced bankruptcy attorney.  It is important to identify any outstanding payday loan before filing bankruptcy.  Most payday loans are discharged without issue; however, payday loan companies are becoming increasingly more knowledgeable and aggressive towards debtors in bankruptcy.  Discuss the matter with your attorney and protect your legal rights.

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